Buying without 20% down? Is it really that bad if you can afford to?

Asked by Casey1400, Carlsbad, CA Tue Mar 12, 2013

My husband and I make very good salaries and we have determined a budget to stay within. This budget allows us either one of us to pay the monthly mortgage taxes HOA insurance utilities if the other loses their job (very unlikely - but I'm very cautious) if we were to put 5-10% down. It allows us to still save quite a bit of money if we both stay employed (we both have secure jobs).

The problem is we paid for our entire wedding and will not have 20% down saved until a year from now. As I said, I'm extremely cautious but I'm also aware that interest rates are VERY low and now is a good time to buy. We have been pre-approved because of our high credit scores but I'm freaking out because everyone says that you should wait until you have at least 20% down. I know a year isn't that long, but we found a lender who might give us a loan without PMI insurance at a super low rate. If you eliminate PMI, is it still smarter to wait until we have 20% down?

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Russ Ravary, Agent, Commerce Township, MI
Tue Mar 12, 2013
I think it is fine to buy without 20% down. I think both interest rates and home prices are on the upswing. So why wait for a higher interest rate or higher home price if you have a god deal on a mortgage
0 votes
Edith Karoli…, Agent, Winnetka, IL
Tue Mar 12, 2013
It seems that you are very financial prudent, and you are absolutely right, interest rates are low and it is
an interesting time to buy... You may be able to work around the 20 % down.... I think what is most important is, are you ready to buy, do you know exactly what style, what type, what size of property you
are looking for, if you are looking in Chicago is it a condo, a townhouse, high rise, mid rise, low rise,
close to what????? where is work, do you need one or two garage spaces?, balcony, have you considered the monthly assessment fees that come with a condo, and they are very very different
many include a lot but all include different items, do you have pets, some do not accept pets.....

Here is my suggestion to you, you already know that your credit score is good and you are financially prudent, connect with an experienced understanding local Realtor, who will be able to provide you with
information about all those properties that meet your needs in buildings that fit your taste....
Remember that when you purchase a condo the lender will include the assessments and taxes with the
purchase price to provide you the loan.... so you want an agent who will provide you with all that information... I can e-mail you those condos or townhouses for your review so that you get a good feel
for what you can buy in your price range. There is also the question of elevator building or not,
balcony, in unit washer and dryer, so get all your preferences on a page and connect with a local
experienced Realtor, it may also take you some time to find the place you will fall in love with.

Hope this helps, and congratulations that you are thinking about buying a home! Exciting :)
Good Luck to you

Sincerely yours,
YourRealtor4Life & Chicago, North Shore & Northern Illinois Expert
Working always in the very BEST interest of her clients, Buyers, Sellers and
Investors alike....And always with a SMILE :)

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0 votes
Riccardo War…, Agent, Bolingbrook, IL
Tue Mar 12, 2013
There are great loans out there that do not mandate you out 20% down. You can get a conventional loan with Lender Paid MI at 95% loan to value. Lender paid MI is built into the rate and is not a separate monthly charge. We don't do loans in California but it is not a hard loan to get done.

Good luck!
0 votes
Mike Opyd, Agent, Chicago, IL
Tue Mar 12, 2013
The benefits to buying now is the low interest rate. As rates go up your monthly payments will as well if you wait too long to buy. I would speak to your lender about buying out your PMI up front. I put 10% down when I bought my condo a year and a half ago and I worked with my lender to pay off the PMI upfront at a lower cost than it was going to be if I paid it through out the life of the loan. Most lenders will allow you to do this so I could have that conversation with them before you start looking.
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Bill J Delig…, Agent, Naperville, IL
Tue Mar 12, 2013
As long as you are financially prudent (which it appears you are), you can buy now and pay your way out of PMI sooner rather than later.

Also, look into Lender paid PMI (No PMI now).

Good luck and congrats!
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Alan May, Agent, Evanston, IL
Tue Mar 12, 2013
I think your logic makes perfect sense.

Buy now, with less than 20% down.... which will allow you to lock in an historically low interest rate, and to save, as you put it, quite a bit of money.

Once you've saved enough... you can apply a big chunk to your mortgage to get under that 20%, and have the PMI removed, while still maintaining that ridiculously low interest rate.... if you decide that's what you want to do with your savings.

Good luck.
0 votes
Casey1400, Home Buyer, Carlsbad, CA
Tue Mar 12, 2013
Thank you for the feedback! I mean we're in a really good position but I want to make the best financial decision and take emotion out of it. It's good to know that putting less than 20% down is not a horrible thing as long as we can comfortably afford the payments. I believe if we continue to make the money we make now, we can make 2-3 extra payments per year - which would make a dent in the principle.
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David Hanna, Agent, Chicago, IL
Tue Mar 12, 2013
Buy whenever you are ready. It certainly sounds like you have your financial house in order, and if you can get a good loan without PMI, all the better.
No one can predict if the differences in price versus the other related savings/costs will be better for you now or later. A move up in rates over the next 12 months can change the entire matrix more than these other expenses, but again, no crystal balls available for use.
Paying down the principal every month is another excellent way to reduce your end cost.
If you buy now, and if rates stay low, and if you can still save money to apply to principal, you could refinance in the future, take out the PMI and get the best of all worlds.
Lots of ifs. One thing I can say with certainty about the last 12 months- waiting has not been good for very many people when you look just at rates, terms and pricing, if they were ready willing and able buyers- but that is history not the future.
Trust your instincts, and make decisions you can live with after you review all the choices. Then you will buy when you are ready, and feel comfortable with the outcome. This is your home first, an investment second.
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Manuel Brown, Agent, Chicago, IL
Tue Mar 12, 2013
Dear Casey,

As you have already heard buying now can be cheaper than renting. While you have found a lender that will give you a loan without PMI I would still talk with additional lenders. I am part of the partner exchange with Guaranteed Rate and I work closely with Mary Kay Laurent at 773-516-6859 (also licensed in California.). She is simply amazing with first time buyers. Starting April 1st this year for FHA the MIP will be going up for people who are not currently locked in.

While you could wait until you have 20% down, prices depending on neighborhood are going up. Your alternative to waiting can be paying an additional one or two mortgage payments a year to principal buying down the mortgage. As unemployment goes down the Fed has said they will begin to raise interest rates.

I am in total agreement with you and your husband, purchase seasonably and within a budget for you and your husband which will also allow you both to save for your futures.

Happy house/Conod hunting.
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Irina Karan, Agent, Aventura, FL
Tue Mar 12, 2013
Hello Casey,

First of all - what you are doing is amazing!
You are super financially responsible and wise - and this is just the beginning of your life together!

Buying with 20% down is the best.
This way you get the best rate and no PMI winning combination.

However, the rates might come up in the future.
You won't be writing off your mortgage interest and real estate taxes while you are renting either...
Programs without PMI usually have a little higher rate (which could be offset by the mortgage broker because your credit scores are good), so you can solve the 20% issue.
The faster you buy, the faster you pay off, and the faster your property will start gaining value.
I say go ahead and buy (prior to spring season, if possible).

I also noticed that many buyers overlook the opportunity of paying off their mortgage faster (which saves a great deal of money). For example, if you make one extra principal payment a year (prior to December 10th, so it goes on books same year), they save 7 years on your mortgage term. Two extra payments = 14 years of term shaved off. It sounds like your family just might take advantage of this option.

Hope this helps,

Irina Karan
Beachfront Realty, Inc.
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Philip Sencer, Agent, Chicago, IL
Tue Mar 12, 2013
If you can avoid PMI, which is the main reason to put 20% down, then I see no problem doing it now. Either refinance in a year if you want or just prepay the principal as you get extra $$$ and pay off the loan sooner than 30yrs. My web site has some other lenders that also might give you a good deal.
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Ivan Sagel, Agent, Chicago, IL
Tue Mar 12, 2013

I would buy now with 10% down. You can always pay down the principal or refinance later to remove the PMI. Depending on which Chicago neighborhood you are considering, it can be as much as 50% cheaper to buy than rent. I think truila has a rent vs. buy calculator for you to use. I'd be happy to schedule a meeting at my office to show you your options.

Best regards,

Ivan Sagel
0 votes
Bill J Delig…, Agent, Naperville, IL
Tue Mar 12, 2013
With your lender or with a new lender go over your options and see if you are comfortable.
You do not need 20% to purchase a home, but by putting down less than 20% your costs/payments will be higher.

Compare payments/costs w/ 20% Down
10% Down w/ PMI
10% Down w/ Lender or Borrower Paid PMI

There are options out there for you.

Feel free to contact me should you need any assistance.
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Matt Laricy, Agent, Chicago, IL
Tue Mar 12, 2013
I think if you don't mind paying PMI there is nothing wrong with putting less down. I would try to do 10% though so you don't have to deal with a full condo review.
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