Accumulating a Down Payment
We don't want you to be surprised when you finally set out to purchase a home. That's why now, we'd like you to consider the following:
- How much money you should save for the down payment and closing costs for the purchase of your home?
- Where your down-payment money is going to come from?
- How you should invest this money while you're awaiting the purchase and closing?
THE 20 PERCENT SOLUTION
Ideally, you should purchase a home and have enough accumulated for a down payment so that your down payment represents 20 percent of the purchase price of the property. Twenty percent down is the magic number because it's a big enough cushion to protect lenders from default.
Suppose, for example, a buyer puts only 10 percent down, then property values drop 5 percent, and the buyer defaults on the loan. When the lender forecloses -- after paying a real estate commission, transfer tax, and other expenses of sale -- the lender will be in the hole. Lenders found they are far less likely to lose money on mortgages where the borrower has put up at least a down payment of 20 percent of the value of the property.
LESS THAN 20 PERCENT AND PRIVATE MORTGAGE INSURANCE (PMI)
If, like most people, you plan to borrow money from a bank or other mortgage lender, be aware that almost all require you to obtain (and pay for) private mortgage insurance (PMI) if your down payment is less than 20 percent of the purchase price of the property.
Although PMI typically adds several hundred dollars annually to the cost of your loan, it protects the lender financially if you default. You can also expect worse loan terms such as higher up-front fees and/or a higher ongoing interest rate on a mortgage when you make a down payment of less than 20 percent.