Most everyone has heard at some point that if you’re buying a home, you should put 20% down. However, not everyone knows why. The reason for this is that if you put 20% down on a conventional loan, you don’t have to pay mortgage insurance.
We know this sounds crazy, but in many cases, putting 15-19.99% down can get you a better deal on your mortgage than putting 20% down.
Lenders actually like it when you have mortgage insurance. If you were to foreclose on a home, mortgage insurance could potentially kick in and help cover some of the lender’s financial losses. This would happen if the loan was more than the home was worth. Mortgage insurance is for the benefit of the lender. However, if you pay it monthly on a conventional loan, there are options for getting rid of it. That way you’re not stuck with a higher rate for being a riskier borrower forever.
How Does it Work?
For all the numbers people out there, here is how it actually works. (This is an actual example – but this is not live pricing).
Someone has a 760 credit score was looking to put 20% down on a $250,000 purchase (so getting a $200,000 loan). They had the option of going with a 4.625% rate and paying $1617 in discount points to get that rate. The same buyer also had the option of putting 19.99% down (let’s just say a loan amount of $200,001) – just under 20% equity. With 19.99%, that same rate only cost the same buyer $617 – however, they had to pay monthly mortgage insurance of $18.33/month. If they make all their payments on time, their mortgage insurance drops off after 24 months or sooner ($439 total MI paid). You have to take the savings of $1000 in fees subtracted by potential MI ($439) to get the total savings of $561.
By putting one less dollar down on your mortgage, you could have saved hundreds or thousands of dollars. We’re always looking for creative ways like this one to save our borrowers money.