Home Buyers and the 20% Down Myth

Image showing lender discussing down payment with borrower

Hey, home-buyers (and anyone else needing the down-low on down payments), this is for you!  Let’s take a moment to bust the 20% down payment myth.

Are you desperate to own a home of your own but don’t quite have the down payment you think you need? 

Home ownership…. the American dream!  More than likely, you are saving up for that down payment, dollar by hard-earned dollar, until you have that magic number: 20% of your dream home’s total value. That’s what all the experts say, right? 

For the average American home, 20% amounts to a pretty big number. Throw in closing costs and you’ve got a small fortune to raise – and years to go until you reach your goal. 

It’s great that you’re putting money away toward what will likely be the largest purchase of your life, but there’s one huge mistake in your calculations: You don’t need to put down 20%. 

Yes, you read right. The 20% myth is an unfortunate leftover from the era after the housing crisis, when out of necessity, access to credit tightened up. Thankfully, times have changed, and since FHA loans were introduced more than 80 years ago, mortgages have not required a 20% down payment.

While it’s true that a higher down payment means you’ll have a smaller monthly mortgage payment, there are lots of reasons why this isn’t always the best road to homeownership. 

Let’s explore loan options that don’t require 20% down and take a deeper look at the pros and cons of making a smaller down payment.

Loan options

If you’d like to go the route of government-backed loans, these are your options:

1.)   FHA mortgage: This loan is aimed at helping first-time home buyers and requires as little as 3.5% down. If that number is still too high, the down payment can be sourced from a financial gift or via a Down Payment Assistance program.

2.)   VA mortgage: VA mortgages are the most forgiving, but they are strictly for current and former military members. They require zero down, don’t require mortgage insurance and they allow for all closing costs to come from a seller concession or gift funds. 

3.)   USDA home loan: These loans, backed by the United States Department of Agriculture, also require zero down, but eligibility is location-based. Qualifying homes need not be situated on farmlands, but they must be in sparsely populated areas. USDA loans are available in all 50 states and are offered by most lenders. 

If you’d rather take out a conventional loan, though, you can choose from the following loan types: 

1.)  3% down mortgage: Many lenders will now grant mortgages with borrowers putting as little as 3% down. Some lenders, like Freddie Mac, even offer reduced mortgage insurance on these loans, with no income limits and no first-time buyer requirement.

2.)  5% down mortgage: Lots of lenders allow you to put down just 5% of a home’s value. However, most insist that the home be the buyer’s primary residence and that the buyer has a FICO score of 680 or higher.

3.)  10% down mortgage: Most lenders will allow you to take out a conventional loan with 10% down, even with a less-than-ideal credit score.

Bear in mind that each of these loans require income eligibility. Additionally, putting less than 20% down usually means paying for PMI, or private mortgage insurance. However, if you view your home as an asset, paying your PMI is like paying toward an investment. In fact, according to TheMortgageReports.com, some homeowners have spent $8,100 in PMI over the course of a decade, and their home’s value has increased by $43,000. That’s a huge return on investment!

Why make a smaller payment?

If you’re thinking of waiting and saving until you have 20% to put down on a home, consider this: A recent study performed by RealtyTrac found that, on average, it would take a homebuyer nearly 13 years to save for a 20% down payment. In all that time, you could be building your equity – and home prices may rise. Rates likely will as well.

Other benefits to putting down less than 20% include the following:

  • Conserve cash: You’ll have more money available to invest and save.
  • Pay off debt: Many lenders recommend using available cash to pay down credit card debt before purchasing a home. Credit card debt usually has a higher interest rate than mortgage debt – and it won’t net you a tax deduction.
  • Improve your credit score: Once you’ve paid off debt, expect to see your score spike. You’ll land a better mortgage rate this way, especially if your score tops 730.
  • Remodel: Few homes are in perfect condition as offered. You’ll likely want to make some changes to your new home before you move in. Having some cash on hand will allow you to do that.
  • Build an emergency fund: As a homeowner, having a well-stocked emergency fund is crucial. From here on, you’ll be the one paying to fix any plumbing issues or leaky roofs.

Cons of smaller down payments

In all fairness, there are some drawbacks of making a smaller down payment.

  • Mortgage insurance: A PMI payment is an extra monthly expense piled on top of your mortgage and property tax.  As mentioned above, though, PMI can be a good investment.
  • Potentially higher mortgage rates: If you’re taking out a conventional loan and making a smaller down payment, you can expect to have a higher mortgage rate. However, if you’re taking out a government-backed loan, you’re guaranteed a lower mortgage rate despite a less-than-robust down payment.
  • Less equity: You’ll have less equity in your home with a smaller down payment. Of course, unless you’re planning to sell in the next few years, this shouldn’t have any tangible effect on your homeownership.

Of course this doesn’t mean you should buy a home no matter how much – or how little – you’ve got in your savings account. Before making this decision, be sure you can really afford to own a home. Ideally, your total monthly housing costs should amount to less than 28% of your monthly gross income.

Ready to buy your dream home? We’d love to help you out! Call, click or stop by MembersFirst Credit Union today to learn about our fantastic mortgage rates. We’ll walk you through all the way to the closing! 

Your Turn: Have you purchased a home and put less than 20% down? Share your experience with us in the comments! 

5 Cringe-Worthy Credit Mistakes

Man cringing over credit card mistakes

You don’t need a special news alert to know…

…we’re all human.

Being human means we’re all bound to make a mistake or two when it comes to making credit decisions. Here are 5 of the most common credit card mistakes. See how many you’ve evaded.

Applying for every credit card under the sun (and being approved). Having a little buying power is great, but too much power can lead to a mountain of available credit and plenty of potential to begin mounting debt. This looks risky to a lender. Stick with one or two and be sure they’re the best card you can carry.

Misplacing your magnifying glass—you really do need to read the fine print. Within that tiny print lies the answer to whether you’ll be paying more to have that credit card in your wallet and how long. Do your homework–there are plenty of companies out there with annual fees, short introductory rate periods, difficult repayment terms, fees to transfer balances and more.

How does your card rate? Low, we hope. When applying for a credit card, you probably didn’t opt to be tied for life to its balance. Not shopping for the best rate can mean paying down a balance for much longer than you might realize. Save yourself some time, money and stress and search for the best rate you can get. The lower the rate, the faster the balance will be paid off.

Don’t listen to mom—less isn’t always more. When it comes to paying off high-interest credit cards, making the minimum payments may seem innocent enough, but it leads to bloated balances. To keep balances low and easy to maintain, don’t charge more than you can pay off within a month or two and be sure to make more than the minimum payment. Your future self will thank you.

Fashionably late or just bad credit karma? Though there isn’t a specific formula to follow for A+ credit, one thing’s for sure: making your payments on time, every time, is the best thing you can do to keep your credit score up. Be the life of your own credit party—be fashionably on time with your payments.

When you’re ready to begin building your own credit or make the switch to a card that’s in your best interest, look to MembersFirst to provide a reasonable solution to your credit needs (even for those who’ve thought ‘guilty’ after each of the 5 cringe-worthy mistakes above.) Visit membersfirstga.com for a list of solutions and details on our various credit card programs and promotions for anyone, at any age and any stage.

Goal Diggers: This one’s for you.

email header image hands on wheel splash logo color cropped

We talk often about that stress-inducing ‘B’ word (budgeting…), but why do we concern ourselves with building a basic budget and focusing on putting money in savings anyway?

One word.  GOALS.

Whether you’ve never given it much thought or voiced yours aloud, to your spouse, your mom or even to your barista, we all have financial goals.  Much like snowflakes, no two goals are exactly alike.  Your version of financial freedom may be freeing yourself from credit card debt while your BFF’s view could be paying cash for their next vehicle.

Regardless, you can’t quite get to the point of knowing how to get somewhere without defining where you’re going.  So, let’s take a moment to think on that topic:

“What do I want?”

Before the panic sets in as you realize you’re not quite sure what you want or maybe you feel you want too much and none of it feels attainable–we have good news.  Here’s a simple goal setting worksheet that helps you get it all down on paper and even helps you define the ‘why’ of it as well as suggests some next steps for tracking and rewarding.

Goal Setting Worksheet Preview
Goal Setting Worksheet

A few things to keep in mind when setting your financial goals.

1.  No goal is too small.  Believe it or not, your small goals help you build toward your larger goals anyway, so think small as much as you’d like.  Essentially, you’re testing the waters with a small goal so you can see and feel how the process works.  You’ll soon see how each of the saving/spending choices you’re making become easier.

2.  How do you eat an entire cake?  Bite by bite.  Yes, we threw a cliché out there (kinda).  But, it’s true… don’t become overwhelmed with the magnitude of your financial big picture.  Just like anyone else, you’ll be breaking each goal down into bite-size pieces that make sense for you.  Eventually, you’ll see it all coming together.  For some, that’s major motivation to keep pushing themselves to take more bites, or steps, toward their bigger goals.

3.  The only mistake is not starting to begin with.  You really only have two choices when it comes to reaching goals:  you can choose to work toward reaching them or choose to do nothing.  Even if you jot down your goals on scrap paper (note napkins count, too) and get started with a burst of enthusiasm and motivation then fall off the bandwagon (oops, another cliché) a quarter of the way through, well, at least you started.  Just don’t forget to restart.  You may have to pick yourself up and reassess, but you’re already miles ahead.  The bottom line is… it’s ok to mess up every now and then.

4.  Be lazy.  Yep.  Be lazy.  Make reaching your goals as easy on yourself as possible.  Use the tools available to you to make transitioning from a not-so-savvy to a super-savvy-saver simple.  Once you’ve set a budget to determine the amount you can comfortably save, go ahead and set up an automatic transfer to savings.  Or, even better, set up a payroll deduction from your paycheck to savings.  If you don’t see the cash entering and leaving your checking account, you’ll miss it less (if at all).

5.  See it and believe it.  For the visually inclined, personal vision boardsor tools which use images to help you better define and focus on a specific goal, are growing in popularity.  You can make yours as detailed or simplified as you’d like to help you stay on top of your goals.  For instance, if saving enough money to pay for your child’s future education is part of your plan, you may have photos of your child, images of colleges, books or school logos, along with inspirational quotes about growing up pinned, stapled, taped or glued to a poster board, corkboard or even a blank wall in your home.  Each time you pass these vision boards, they help you remember why you do what you do each day, especially when having to make a tough financial decision.

Gather your own inspiration from our “Vision Board” on Pinterest here.

6.  My goal is (not) better than your goal.  Who’s to say your financial goals are less important or exciting than anyone else’s.  You do you.  You know what works for you.  You know what’s most important to you.  Don’t worry if it seems your ideas of financial soundness aren’t aligning with your peers’; not everyone wants the same things.  In the end, what matters is you’re happy with your outcome.

Talk to us.

If you need a little push in the right direction, let’s talk.  You can drop by and talk with one of our Member Advisors a little bit about your goals, find out which tools you can use to make it easy on yourself and get a little guidance on where your focus should be.

And don’t forget that ‘note napkin’ or your Goal Setting Worksheet.  When someone asks you what your goals are and why, you’ll be ready to talk it through with them and work up a plan that best fits your budget and means.

Good luck, Goal Digger.

Download the Goal Setting Worksheet.

 

What’s your money persona?

what is your money persona

Personality.  It’s what makes us all a bit different.  Sometimes we relate to someone a little better than another based on how eccentric, laid back or direct they are.

Have you thought about how you’re treating your financial relationships?  Are you taking care of your nest egg, so to speak?  Believe it or not, the way you spend cash says a lot about your personality–well, your money persona, anyway.

So, in between all those really important quizzes we take online to determine who our BFF is or what song best represents our lives, why not take one to help determine whether your money-spending (or hoarding) choices are something to be worked on or shared with the world.

With the help of her friend, Lucy, Jen learned a little about her own money persona.  Watch the video, then take the quiz below.


(Pssst…you may want to grab a pen and scratch paper for this one.)

12_B_Infographic_MembersFirst

So, how did you do?  Were you surprised to learn what your money persona is?  Maybe you fell in multiple categories.  Whatever the case may be for you, you can rest easy knowing there are tons of solutions to help you save, invest, make smarter choices with and even spend your money smarter.  You might try checking out our affordable and convenient savings solutions.

We want to hear from you.  Drop us a comment below and let us know how you did.

 

Living On Your Own: Are you prepared?

video screenshot

When you take a look at your finances — what’s coming in, what’s going out — do you approach each bill or expense as a surprise item rather than an item you’ve prepared for?

Let’s look at it this way… you’ve finished school, you’re ready to move out of your parent’s basement and you’ve got money to burn.  What’s your plan?

If your first thought is more I want a sweet, high-rise apartment, downtown with a view of the city and less I have XX amount available to me each month…what can I afford on that budget?, you might want to rethink your strategy. Take a look at this spending ratio. Try your own.  What can you afford?  Does your dream apartment on the upper west side become a reality or did you just have a reality check?

11_F_Social_01_US

Just like you had to prepare a budget at some point so you’d know how much pizza and ramen noodles your budget could take (oh, and those pesky cellphone, internet and insurance bills you may have been forced to pay while living at home), living on your own has its own category of expenses you may not have even thought of.

If you hear the words “renter’s insurance” and your first thought is yes, I’d like someone to ensure that I will obtain rent, then read on a little further, my friend.  While you may have thought as far as what your monthly rent might look like and maybe even where you’d like to live, don’t forget these one-time expenses.

11_F_Social_03_US.jpg

If you’re lucky, you might have a few friends you can pay in pizza and soda that will help you move.  You might even have the packing materials and a few staple pieces of furniture to help get you started.

Unfortunately, living expenses won’t stop there.

11_F_Social_04_US

It’s important to also consider the location you’d like to live and do a little research on monthly rental averages.  A suburban apartment or home may dole out a much more affordable scenario than a renter’s monthly expenses in a more city-like environment.  On top of that, the average rental expense increases and decreases by the area.  Look at your budget… then take a look at this.  Is your budget more Manhattan- or Tucson-friendly?

11_F_Social_02_US

So… are you rethinking your strategy for living on your own?  How many household expenses did you budget for?  Is there something you’ll have to give up in order to live comfortably?  Let us know!  Comment and share below.

For more on rent and living on your own, stay tuned.  We’ll take a look a rental agreements–what to look for and what to avoid–and dig a little deeper into your budget to make sure you’re maximizing your income while still being able to enjoy and afford life.  After all, that’s why MembersFirst is here.

Ready to make the switch to a financial institution interested in seeing you at your financial best?  We’re ready when you are.

join today button