Should I Wait Until I Have 20% Down?

In some markets it may make sense to wait until you have enough down that you do not need to pay mortgage insurance, but, in this market DEFINITELY NOT!!! Mortgage insurance is designed to provide the bank protection against you defaulting on the loan. With a conventional mortgage the bank believes when you have 20% equity into the home it is unlikely that you will walk away from the mortgage, and no longer requires mortgage insurance. With an FHA loan the mortgage insurance premium remains as long as you have the loan. We often hear from people who are trying to make wise financial decisions, who believe that postponing a purchase today will save them money, but nothing could be farther from the truth. 

The feds have stated that they will raise interest rates every time they meet this year. What we do not know is how much that increase will be. Few people foresaw that rates would jump a full point in January. Todays’ interest rate is 3.75%. 

Due to the high demand, analysts have increased their predictions on the appreciation gains of this year from 5 to a whooping 10%. Historically, a gain of around 3% per year is “normal”. So that same home that was for sale for $350,000 would be worth: 

If it takes you 2 years to save 20%, that same $350,000 home would be selling for $408,452. The interest rate would be significantly higher and you would have been paying your landlords mortgage for 2 years instead of your own. 

Mortgage insurance rates depend on your credit score and the amount you put down. The better the credit and the more down, the lower the risk, and thus, the lower the mortgage insurance rates are charged. Based on this same home, mortgage insurance would range from a couple thousand to around $7,200. But the cost of waiting would have been: 

$58,000 (2 years of appreciation lost) 

$185,760 (additional paid over the life of the loan due to the increased interest rate and increased purchase price).

In this example, the total cost of delaying a purchase for 2 years would total over $243,000 to save less than $7,200 in Mortgage insurance. Not a wise move. 

Once you have 20% equity in the property on a conventional mortgage, you can drop the mortgage insurance. Some lenders may require that you maintain mortgage insurance for at least 2 years. If you believe that you have arrived at 20% equity by appreciation and home improvements it is up to you to prove that. You will need to hire an appraiser that is approved by your mortgage company to prove that. When you get to that point, call us before you spend money on an appraiser, and we will do a market evaluation at no cost to you so you can be certain! Remember this only works on a conventional mortgage, an FHA mortgage the mortgage insurance will remain in place.

We always say the best time for you to purchase is when YOU are ready to purchase. However, if you are waiting to save money, NOW is the time to buy.

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