Many people believe you need a 20% down payment to buy a home. While putting down 20% helps you avoid private mortgage insurance (PMI) and secures better loan terms, it’s not always required.
What Is PMI?
PMI, or private mortgage insurance, is required when you put down less than 20%. It protects the lender if you default on your loan. PMI costs typically range from 0.5% to 1% of your total loan amount annually.
However, once you reach 20% equity in your home through payments or market appreciation, you can remove PMI and lower your monthly mortgage costs.
Minimum Down Payment Requirements
If you don’t have 20% saved, there are other options:
- Conventional loans: Require as little as 5% down.
- FHA loans: Allow first-time buyers to put down just 3.5%.
- VA loans: Available to eligible military service members and veterans with 0% down.
- USDA loans: Offer 0% down for eligible rural homebuyers.
- Down payment assistance programs: Many state and local programs provide financial help to first-time buyers.
- BMR (Below Market Rate) properties: Reserved for lower-income buyers, these homes offer a more affordable path to ownership.
Buying in High-Cost Markets Like San Francisco
In expensive markets such as San Francisco, some buyers choose to put down less than 20% and pay PMI temporarily. This allows them to enter the market sooner instead of waiting years to save a full down payment. However, a lower down payment can result in:
- Higher monthly mortgage payments
- Possible PMI costs
- Potentially higher interest rates
Use a mortgage calculator to determine a monthly payment that fits your budget. If you need help exploring homeownership programs or financing options, reach out to our team today.
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