I am a fan of Dave Ramsey and statement “do the math stupid.” OK, it’s not nice to offend people, so I am sorry about that. Besides I am not saying you the reader are stupid…OK, the point of my post is comparing a Mortgage Payment with 15% down compared to $20% down.
If you can put 20% down, which I suggest all my customers who can do to this you will avoid something call Private Mortgage Insurance. PMI is the lender buying insurance against you defaulting on the loan. The worst part is the lender is charging you for this…that is a whole other topic. History has shown us that a person who puts down 20% of more will not likely default on a loan given financial hardships. Or worst case scenario is they will be able to sell the property and get out from under the mortgage debt.
I had a mortgage broker friend of mine at Lending Path Mortgage run a scenario with $124,000 Loan amount. At 20% down at 3.5% interest rate, the payment is $578 per month, needing $24,856 for down payment and closing costs. At 15% down 3.5% interest rate the payment is $626 per month, needing $18,683 for down payment and closing costs. That is $48/month difference, with $20 being PMI. NOW, if you pay 2 additional Principal payments per year (Roughly $400), over the course of 3 years, you will have paid down the additional 3% of your loan, assuming the market increases 1% per year, you will have 6% more equity in your home than when you purchased it, thus you will have more than 20% equity at which point you will be able to have the PMI part of your payment taken off.
If you do the math…you save $6,173 up front on your down payment and closing costs, it “costs” you $400 X 6 = $2400 (additional Payments) + $20X36 $720 (MI payments) = $3120…The math suggests given this scenario you could be better off putting 15% down than 20% down….
If you are purchasing a home and would like a Realtor to walk you through the numbers, please reach out to me. Even if you are just putting 5% down, you still want to ‘know the numbers,” and I happily walk you through that process. Just don’t be the customer, who is buying a home for $480,000 and has $80,000 in the bank, and fired me after I showed them that 15% down is most of the money you have in your bank, plus closing costs will clear out your savings. I didn’t say they had to buy the $400K plus home…in fact the conversation was to suggest maybe we look at homes under $300K…But nope, at the end they left my office, never to call me again….sadly that customer never purchased a home to take advantage of the Tax savings with Mortgage Interest Deduction.