With mortgage rates at an all-time low, homebuyers, real estate investors and homeowners who want to strengthen their finances should consider how they can benefit before rates increase.
Last week, we shared with you how much a percentage point can be worth on your mortgage. This week, we’re going to discuss down-payment options and how to balance your down payment and cash reserves.
What low down-payment options are available
First-time buyers represent about 45% of the housing market, according to a recent survey by Zillow, but they aren’t the only buyers who prefer to make a down payment of less than 20%. Zillow’s survey found that 56% of buyers make a down payment of less than 20%.
Numerous options are available for borrowers who want to make a lower down payment or even zero down payment. Veterans may be eligible for a VA loan with no down payment and buyers in rural areas and some suburban areas may qualify for a zero down payment option from USDA Rural Development’s program.
Other options include FHA loans, which require a 3.5% down payment and the Freddie Mac BorrowSmart program offered by FM Lending Services, which has a 3% down payment requirement and includes a credit of up to $2,500 toward that down payment or closing costs. Some loans, such as the Welcome Home Zero Down program also from FM Lending, include a first loan and a second loan to cover the down payment or closing costs.
Some low down payment loan programs are exclusively for first-time buyers or have income limits, such as a household income of 80% or less of area median income. The range of options is broad, so a consultation with a lender is recommended to explore your choices in the context of your individual financial circumstances and goals.
Low down payment loans often require mortgage insurance, which will increase your monthly payments. Some loan products don’t require mortgage insurance and others allow lender-paid mortgage insurance, which means you’ll pay a slightly higher interest rate but won’t need extra cash for the mortgage insurance every month.
How to balance your down payment and cash reserves
Determining the size of your down payment and how much you should keep in the bank for emergencies is a balancing act. While some studies of the housing crisis associated low down payment loans with defaults, recent studies show that having cash reserves is more important to sustaining homeownership.
Keep in mind that a low down payment will increase your loan balance, which could push your payments beyond your comfort level. In addition, you could be required to pay mortgage insurance, which also increases your monthly payment.
While some loan programs and lenders require a specific level of cash reserves, such as two months of mortgage payments in a liquid bank account, you should also consider your own finances to decide how much to keep in the bank after you buy a house. A common rule of thumb is to have three to six months of your total expenses in an emergency savings account.