It’s surprising how often I hear from renters—and even agents—that they’re holding off on buying a home because they think they need a 20% down payment. Let’s set the record straight: You don’t.
As industry professionals, it’s on us to educate our buyers. By doing so, we can empower families, counter misinformation, and keep those “wolves” like Zillow and other third-party platforms at bay.
The Myth of 20%: Why It’s Outdated
The idea of needing 20% down stems from a mix of old advice, the mortgage meltdown years, and misinformation from friends, neighbors, or the internet. But in today’s world, putting less down is not only possible—it’s often smarter.
For many in our area, saving 20% is daunting. On a $450,000 home, that’s $90,000 upfront, not to mention closing costs, moving expenses, and everything else that comes with homeownership. Most buyers are already stretching to save while paying rent. So why not explore options that allow you to buy sooner?
The Numbers: 5% Down vs. 20% Down
Here’s a comparison to show the real impact:
$450,000 Home | 5% Down | 20% Down |
Down Payment | $13,500 | $90,000 |
Loan Amount | $436,500 | $360,000 |
Interest Rate | 6.5%/6.27% APR | 6.5%/6.647% APR |
Monthly Payment (P&I) | $2,758.98 | $2,275.44 |
PMI | $141.86 | N/A |
Total Monthly Payment | $2,900.84 | $2,275.44 |
With 5% down, you’ll pay a bit more monthly, but you’re in the game much sooner. Plus, PMI is temporary for conventional loans—it can typically be removed once you reach 20% equity.
Why Buy Now with Less Down?
Waiting to save 20% may cost more than you think. Let’s break it down:
- Saving Time: If you’re saving $500/month, it would take 13 years to save $90,000. That’s $390,000 spent on rent during that time, not to mention lost equity from rising home prices.
- Rising Prices: Assuming 3% annual appreciation, that $450,000 home could cost over $600,000 in 13 years.
- Lost Wealth: By waiting, you’re missing out on tax benefits, equity growth, and building wealth for your families future.
Options That Don’t Require 20% Down
Here are some great alternatives to get you into a home sooner:
Conventional Mortgages
- 3%, 5%, 10%, or 15% Down: Flexible options for buyers, some with reduced or no mortgage insurance.
- 0% Down: Programs for first-time and repeat buyers with no money down.
Government-Backed Loans
- VA Loans: No down payment, no mortgage insurance, and flexible credit requirements. Costs can even be covered by seller concessions or gift funds. Must be a Veteran.
- FHA Loans: Only 3.5% down, with options to use gift funds or down payment assistance.
- USDA Loans: Zero down, location-based eligibility. I can help you determine if a property qualifies!
The Benefits of a Smaller Down Payment
Buying with less down has real advantages:
- Conserve Cash: Keep funds for emergencies, investments, or home updates.
- Pay Off Debt: Use extra cash to eliminate high-interest debt.
- Boost Credit: Lower debt increases your score, improving rates on other loans.
- Buy Sooner: Start building equity and wealth today.
Things to Consider
Of course, there are trade-offs:
- Mortgage Insurance: This cost is temporary and often deductible (depending on income).
- Slightly Higher Rates: Smaller down payments may come with slightly higher rates, though some programs actually offer lower rates with less than 20% down.
Bottom Line
- Home prices are rising: Lock in today’s home price, that’s permanent.
- Rates are temporary: Refinance later when rates drop.
- Rent builds your landlord’s wealth: If you rent or buy, you are paying a mortgage-the difference is in one case you are building your families wealth and in the other, well-your landlord thanks you.
If you have questions or want to explore your options, I’m here to help. Let’s make homeownership a reality for you!
Scott Davis Regional Vice-President NMLS ID 166596 O: (571) 800-1974 | M: (703) 209-3138 E: scott@davisteam.com W: DavisTeam.com |