How Does the Amount You Put Down Impact Your Monthly Mortgage Payments?

Baltimore Real Estate Podcast with Seth and Alyce Dailey

When it comes to buying a home, whether it is your first or your fifth, it’s important to know all of the facts. Many mortgage programs allow buyers to purchase a home with down payments well under 20%, which will require private mortgage insurance (PMI). Freddie Mac defines PMI as an insurance policy that protects the lender if you’re unable to pay your mortgage. It comes in the form of a monthly fee that is rolled into your mortgage payment, and is required for all conforming conventional loans with down payments under 20%. That said, you can cancel your PMI once you’ve built up to 20% equity in your home. In other words, PMI is not a permanent expense. The cost of it will vary depending on your loan-to-value ratio and your credit score, but, on average, homebuyers can expect to pay between $30 and $70 per month for every $100,000 borrowed. “The added cost of PMI enables many to purchase property now and begin building equity rather than waiting years to save enough for a 20% down payment.” According to the National Association of Realtors, the average down payment for all buyers last year was 10%. But the figure varies when examining first-time homebuyers, who had an average down payment of 5%, and repeat buyers, who had an average down payment of 14%. This higher down payment observed across repeat buyers was no doubt aided by the sale of their previous home. This just goes to show that PMI does not generally act as a deterrent for those looking to purchase a home. Yet, putting 20% down can save you a lot of time and money. Imagine that you’re purchasing a $200,000 home with a 5% down payment. In this case, your monthly mortgage payment with PMI would likely be around $1,022. However, purchasing this same home with a 20% down payment would leave your monthly mortgage payment at just $773. This is a huge savings. The larger the down payment that you can make, the lower your monthly payment will be. Nevertheless, the added cost of PMI enables many to purchase property now and begin building equity rather than waiting years to save enough for a 20% down payment. If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.