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The Low Down on Down Payments

There are plenty of myths floating around when it comes to down payments. 20% is often referred to as being the standard. However, while 20% will help persuade the seller with immediate cash compensation, it can be hard to save up this amount of money, especially when timing your purchase with the market.

In reality, 13% is the median percentage for a down payment on a house. So where does this number come from? The people who do have the means prefer to shoot for 20% because it allows them to avoid purchasing private mortgage insurance, or PMI.

However, organizations like FHA can offer what’s called down payment assistance. With these types of loans- buyers can purchase a home with only 10% down with a credit score of 500 or higher, and as little as 3.5% with a score of 580 or higher. If you think that that’s low, USDA and VA will allow you to take out a mortgage with 0-3% as a down payment.

Of course this doesn’t come without drawbacks. These mortgages often have very high interest rates, and they require you to pay MIP or a monthly insurance premium. These factors lead to much higher monthly payments for homebuyers as a trade-off. The good news? Buyers can refinance down the road to get rid of their MIP and lower their monthly payments down the line.

The lesson is that down payments come in all sizes, and ultimately what’s best for you will depend on the property and the purpose. If you are looking to buy a multi-unit investment property, it’s better to use a larger down payment. By keeping your monthly mortgage payment low you can ensure that your tenants will cover your expenses. 

If you’re buying a family home for yourself, it might be much harder to save, but you can save time by paying a little more each month and using a smaller down payment.