A Down Payment Fit For You: Beyond 20 Percent

The real estate market along the Front Range is hot! As median home prices continue to rise, first-time homebuyers are faced with a number of options when selecting an appropriate down payment for their specific situation. With all these options, homebuyers should take the important first step to learn about these down payment opportunities. Many buyers, especially first-timers, subscribe to some falsehoods, keeping them out of the game for much longer than necessary. For example, many have the misconception that you need 20% down, or that sellers won’t accept gifted offers.

But first, a quick recap: A down payment is the amount of money a buyer pays at closing to fund a home purchase, usually stated as a percentage of the total home price. The purpose of a down payment is to demonstrate personal involvement in the purchase of a house. It also protects the lender against possible losses in the event of default.

A 20 percent down payment is known as the standard down payment, giving the buyer instant equity in his or her home, greater buying power and lower monthly payments. Plus, it means you don’t need to purchase mortgage insurance.

But 20 percent isn’t the only option. Here are some alternatives homebuyers should know about:

  • Three percent (or more) down payment. If you have limited funds for a down payment, your down payment can start at three percent down. In addition, all of these funds can be gifted from a relative. With down payments under 20 percent, the borrower pays private mortgage insurance (PMI) to insure the lender against losses in the event of foreclosure. The amount of coverage and premium are based on loan-to-value (LTV) and your credit score, with a maximum LTV of 97 percent. Payment options include a one-time mortgage insurance premium or monthly payments.

We’ve seen that the appreciation of homes in our area often outpace PMI. If you’re paying monthly, you can request an appraisal after two years. If the value of your home has gone up and the original LTV is now 80 percent, PMI may be removed (this is lender/investor dependent).

How much does PMI cost? For every $100,000 in loan amount:

With three percent down, PMI would be approximately $690/year.

With five percent down, $400/year.

With 10 percent down, $290/year.

With 15 percent down: $190/year.

  • 80-10-10. This option is comprised of 80 percent first mortgage, 10 percent home equity line of credit (HELOC or second mortgage) and 10 percent down payment. While the advantages of an 80-10-10 include a lower down payment at closing and no mortgage insurance, HELOCs often have adjustable rates, so your payment can increase over time. HELOCs can also have a balloon payment if they are interest-only.
  • Down payment programming with Elevation Credit Union. Like everything in real estate, down payments aren’t one-size-fits-all. Elevations offers a variety of down payment programs. Chat with a member of the mortgage team early on in your home search to ensure you are on the right path for securing finances and organizing the details.

For more information, try our mortgage affordability calculators, sign up for a complimentary seminar or contact our mortgage team.

Author Elizabeth Million

Boulder local Elizabeth Million shares advice on home buying and mortgages picked up from the diverse roles she’s served in the real estate industry, including appraisal business owner and mortgage loan officer for Fortune 500 companies. In her current role as VP of Mortgage Lending, Liz has led Elevations to the title of largest credit union mortgage lender in Colorado.

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