A recent New York Times article gave a number of suggestions on how to avoid a 20% down payment on a home mortgage.
The implications of a 20% down payment are that if you cannot make it, you typically must pay for the added cost of private mortgage insurance (PMI), because you are deemed to be an increased financial risk by mortgage lenders.
One of the suggestions given in the article is to take out a second mortgage, often called a “piggyback loan” equal to 10%. In that scenario, you would put 10% down, get 80% from the mortgage, and get the final 10% from the second mortgage (often in the form of a HELOC, where you pay prime rate plus a few percentage points).
I’m no stranger to this strategy, having used it on my first home to avoid paying for PMI, with only 10% down. It allowed me to get the home, but in retrospect, I narrowly avoided catastrophe.
In 2007, I moved across the state for a much more lucrative position in a booming industry, and I sold that first home. Had I not been selected for interviews, been offered, and taken the new job, there is a very strong possibility that I would have lost my sub-$40K job in the very hard hit non-profit sector. And with little savings to my name, the result could have been foreclosure on the home had I not found a new job. By luck, I narrowly avoided financial ruin.
What I didn’t realize at the time (and my mortgage broker wasn’t exactly tripping over himself to spell out to me) was that there was good reason why lenders often require 20% down or 10% + PMI – it negates their financial risk.
Limiting risk is good for them, but it’s also good for you.
Homes are a massive financial commitment – the biggest purchase you will make. And if you cannot afford to put 20% down on a mortgage (and have some solid emergency savings to fall back on), there is a very strong possibility that you are not in good enough financial position to purchase that home.
20% isn’t really a magic number, but getting to that level and beyond is indicative of a household that has reached a good level of financial stability, backed by strong financial habits (and typically solid income). All those things limit your risk.
The NYT article goes on to discuss even less savory options than piggyback loans, such as low down payment/high interest loans.
Haven’t we already been down this road before? Wasn’t the housing bubble, financial crisis, and Great Recession caused in large part to pushing people into homes they could not realistically afford? History seems destined to repeat itself, due to greed.
We should not be avoiding 20% down payments, we should be embracing them because it shows you have financially arrived!
You don’t need a big home, and if you’re not financially ready for it, you don’t need a home at all. There’s no shame in that – if your dream is to own a home (hate to buzz kill, but they are a lot of work and worry), that day will eventually come. Getting there sooner by avoiding down payments is not the answer.
Related Posts:
I agree that a lot of people try to put less than 20% down on the purchase a home. The way I look at it, I’ll know that I can afford a home if I can put 20% down. If I can’t, the home is probably out of my budget.
I live in an area where a lot of my peers have and are currently purchasing homes with as low as zero percent down through the USDA Rural Development program. I can’t seem to wrap my head around it… Why not live in an apartment for a year or two to save enough for a bulkier down payment to have immediate equity?
The problem I see in my area is never-ending sprawl and frequent “trading up” where residents don’t stay in homes for as long as the traditional 30-year mortgage would favor. My friends have bought new construction rural development homes in nice neighborhoods for ~$180k (most have put something down – usually around 5-10%). As I look at real estate listings, I see that comparable homes (not new construction anymore, but now 5-10 years old) in similar developments are now going for less than what the homeowners paid for them. Within 5 years, did those homeowners build up enough equity to cover the degree to which their homes are underwater (from what I can tell, they’ve lost about 15% of the original home value) and all the expenses associated with selling the home? I’m not convinced.
Plus, I just watched The Big Short a couple nights ago and now I’m in mortgage-rage. I wish I could just buy outright!
I can’t wrap my head around any of it.. Its greed in the industry from real estate folks, to lenders, to the under writers..
There is also in many cases where Rent is more than buying a home so in those cases I’d say jump in if you are 100% committed at the end of the day you will have more equity buying than renting and waiting to save up.. the key is Discipline and not buying a home beyond what your life style can afford.
The industry has already gone back to 0% down mortgages.. As a whole we didn’t learn shit from 2008… get ready for the next debacle..
If you are in good financial shape and can easily afford 20% down, why would you want to? Why wouldn’t you want to borrow at 3.5% then take the excess and invest at a higher rate? All the while having the house appreciate in value and deducting the interest paid on your taxes?
why would you want to take on _further_ debt in the hopes that other people, the stock market, will come through for you?
Given the Fed’s reluctance to raise rates since the Great Depression 2.0, why would you feel that the economy is strong enough to offer any surety of a solid rate of return?
They clearly don
Why would you not believe in the stock market over the long term? We are talking a 30y timeline if we are discussing the trade off bt the interest paid on a mortgage v investing the difference.
1. Most people don’t take the money and invest it
2. The lower your down payment, the higher your APR
3. It’s debatable in this slow economic growth investment climate whether paying off debt or investing gets you a better return
1) of course. Not everyone has discipline.
2) yes, but we are talking a point on the very high side. Not like it becomes 14% all of the sudden
3) if you think stocks won’t outperform a 4% mortgage over the life of a 30y loan, i can’t help you. It’s not like the mortgage isn’t getting paid down, it’s just allocating less up front to get started.
How disappointing that indeed nothing has been learned.
In 2002 my husband and I bought our first home with an all time low interest rate .. 8.5%. These low rates were something truly new. Twenty percent down to avoid PMI. The mortgage we calculated was based on one income, not the two my husband and I made. They looked at us like we had 2 heads.
In 2002 we built a home, the smallest size allowed in our neighborhood. Interest rates kept dropping so we refinanced twice, each time paying down the mortgage. They looked at us like we had 3 heads.
In 2013 we paid off our mortgage. Maybe we will never be rich by not working the angles, but we can sleep at night under our own roof.
Correction: 1st house: 1992
As long as you have a good cushion of emergency fund it is actually a good idea to use less money to purchase your house and use the difference to invest in the stock market. The key is to be able to use your emergency fund to pay your mortgage if you need to do so. You also get to deduct the interest from your taxes. This is especially powerful to use as a strategy on investment properties where your returns are greatly increased due to leverage the less money you put down on the property.
would anyone suspect that the anticipated time living in the newly bought home to be a critical factor on the down payment? why or why not? (ie: if you only plan on living in this home for 4-5 years then reselling, would it be most beneficial to only put down the minimum (or less than 20%) and if you plan on this home being your “forever” home would it make more sense to put down the 20%? or does it even matter?).