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What is the 20% down rule for home financing?

One of the common myths about home financing is that you have to put 20% down to buy a house. Actually a majority of people put down less than 20% and many only put down 3% of the purchase price. I’ll will constantly go back to this topic because it is the big myth that is preventing qualified people from purchasing their first home.

Did you know it is not always a good idea to put 20% even if you can?

Let’s say you have the 20% to put down. If you can, why would you not put down the full 20%? It is true that you can avoid Private Mortgage Insurance by putting 20% down. But there are good reasons to avoid the 20% down.

Putting down less will avoid a “Loan Level Price Adjustment”

Most people assume that putting down more will get you a better rate. This is not true. By putting down less than 20%, you will avoid a .25% loan level price adjustment. Conventional will give a slightly better rate for putting down less than 20% because the Mortgage Insurance reduces risk to the lender. That .25% price adjustment is to the fees not to the rate. Contact us for details on this.

Waiting until you have saved 20% will cost you in the long run

Saving up 20% can take a long time. Real estate in Omaha increased 3.61% a year over the last 9 years. For every year you wait to buy a home, that home will cost you 3.61% more when you do purchase it. Saving to avoid a few hundred dollars in MI could cost you tens of thousands in equity in your home.

Mortgage Insurance is not as much as you think

Now granted no one wants to have a higher mortgage payment. But the most common response I hear when I tell people how much they will pay in MI is “Oh that is not as bad as I thought”. I think there is a misconception that MI is hundreds of dollars a month. While the amount you will pay for MI is based on the down payment, size of the loan, and credit score, for an average size home in Omaha, with excellent credit, the MI is only a few hundred a year.

Everyone’s situation is different so the best thing to do as soon as you decide you might want to own a home in the future is contact us. We can go through your time frame and current financial situation and determine the best course of action to get you in your dream home.

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