How Much Do I Need to Put Down?

If you’re like us, you have a list of resolutions this year.  A lot of people we’ve spoken with lately tell us that buying a home in 2016 isn’t necessarily their New Year’s resolution, but planning to buy a home is–with one thing in their way: the down payment.

Most of us often feel anxious and overwhelmed at the idea of saving for a down payment.  The good news is that first-time home buyers can purchase a home with as little as 3 percent down in some programs.  There are a few stipulations to this, but we’re giving you the lowdown below.

The less you put down, the higher the mortgage balance, and the more you’re going to pay.  Typically, homebuyers who don’t make a minimum down payment of 20 percent will be required to pay private mortgage insurance (PMI).

What is PMI and how much does it cost?

PMI protects the lender in the event you default on your loan.  The cost is most often added to your monthly payment if you’re taking a conventional loan, while loans offered through the Department of Veterans Affairs, the U.S. Department of Agriculture and the Federal Housing Administration handle PMI differently.

The less you put down, the higher the mortgage insurance is.  With say, 5 percent down, your PMI is quite high.  The total cost of PMI depends on your credit score, and is calculated in terms of risk in tandem with the size of your down payment.  For each $100,000 borrowed, PMI typically runs between $30 and $70 per month.  If you’re buying a home worth $500,000, with say, 10 percent down, with a 30-year-fixed rate at 4.25 percent, you could expect to pay up to $200 per month in private mortgage insurance.

You have options.  If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment.  If you get a conventional mortgage, you can get an appraisal and write to your lender and ask to have the PMI removed once you have more than 20 percent equity in the house.  FHA loans, on the other hand, have PMI attached for the life of the loan.

So how much should you put down? 

Depends on your personal circumstance.  You’ll want to make sure you have enough on hand for closing and upfront costs, such as a years worth of taxes and insurance.  We suggest speaking with a mortgage broker who can examine your current situation and make a plan that’s in line with your goals.  A good mortgage broker can help you weigh your options and help you decide how large of a down payment you’ll need.

There are a few popular programs you can get with a low down payment, which may be particularly appealing to first-time home buyers.

Conventional mortgage: Fannie Mae and Freddie Mac can back loans with as little as 3 percent down.   To qualify for this type of loan, you’ll need good credit.  If your credit isn’t in good shape right now, talk with a broker than can put you on a good trajectory to start the repair process.

Federal Housing Administration loan: This can be more expensive than a conventional loan, but the FHA has backed loans with as little down as 3.5 percent.  They’re also more willing to back loans with buyers who have lower credit scores and thinner credit records.  PMI will certainly be factored into this, making the size of the loan you’ll be able to afford a bit smaller due to the monthly payment.

U.S. Department of Veteran Affairs: If you served in the military, you can get a loan backed by the VA with no down payment at all.  You’ll have loan origination or funding fees but those can be financed in.  This is a really good program, though you’ll still need to qualify based on credit and income.  The interest rate is low, there’s no PMI and you may find some extra perks along the way.

For the Love of Chocolate Covered Bananas

We’re big fans of the diced bananas dipped in dark chocolate at Trader Joe’s.  We’re also big fans of the fact that Trader Joe’s is a stone’s throw away.  We’re even bigger fans of the thought that home appreciation may have a direct correlation to Trader Joe’s and Whole Food’s locations, and maybe our chocolate covered bananas.

Two of our most basic needs as humans are food and shelter.  RealtyTrac looked at home values, their appreciation and their adjoining property taxes in U.S. Zip Codes with a Whole Foods or Trader Joe’s to determine the best combination of food and shelter.  Both stores have a cult following, but does that cult follow lead to greater appreciation?

The study found that homeowners near a Trader Joe’s have experienced better home value appreciation since their original purchase, but also pay higher property taxes on average.

Here’s what we also found in the report:

Homeowners near a Trader Joe’s have seen an average 40 percent increase in home value since they purchased, compared to 34 percent appreciation for homeowners near Whole Foods.

Homeowners near a Trader Joe’s pay an average of $8,536 a year in property taxes, while homeowners near a Whole Foods pay an average of $5,382 per year.

Included in the methodology of the report is the fact that only zip codes with at least one OR the other were taken into account.  Neither zip code had both.  There’s much more to take into account in considering average home value and appreciation, but the thought is interesting.

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How to Buy A Home In A Competitive Market

More people are taking the leap to homeownership as a result of rising rent prices, job security, low interest rates and generous home loan programs.  And that just might be your dilemma, that many people are doing this, and for good reason, but it might be making the market a bit more competitive.  In areas where inventory is low, homes are being snatched up in a matter of days.  To help you land the home you want, follow this guide to give you the edge in a competitive market.

Get a pre-approval letter.  A pre-approval letter shows you’ve been vetted, you’re serious and you’re ready.  This also gives you a realistic idea of how much of a mortgage you can afford so you can limit your search to houses in your price range before setting your sites on properties out of reach.

Make sure your agent gets the scoop.  A good agent will find out the scope of interested parties in a house before writing an offer.  Knowing how many people have seen it and written offers on it will tell you how aggressive you need to be.  Knowing the seller’s story and timeline can also work to your advantage.  Something that doesn’t match up with the sellers timeline might get rejected.  It also lets us know in advance to start preparing for a bidding war.

Be flexible with timing.   That being said, you can improve your chances of landing the home you want if sellers know that you are willing to work with their schedules in as quickly– or as slowly–a manner as necessary.

Make it personal.  Real estate is a visual industry: you look at homes, you look at neighborhoods, you look at the numbers, sellers look at offers.  All of this can get cold and impersonal.  Consider adding a personal letter that shows why you love the house and what you plan to use it for.  Some people with an emotional attachment to the home they’re selling may be inclined to sell it to someone they know will take care of it and appreciate it the way they did.

Pay more upfront.  Money talks.  You can beef up your offer by providing more money up front in your earnest money deposit.  The cash works as insurance for the seller in case the buyer backs out of the deal.  Knowing you have more skin in the game might make take your offer as the safe bet.

What your millennial might be crying about today.

It’s not because someone has left a hurtful comment on their latest selfie, or because their skinny jeans don’t fit anymore, but many millennials these days are having legitimate concern over their future, and where their future will take place geographically.

It’s no surprise that cities with most economic prospect draw residents from all over the country.  You’re going to go where the jobs are, and where the money is.  Young couples looking to buy a home, raise children and achieve the American Dream are facing a broad dilemma in California.  Macro-economics teaches us that the cities with the least affordable housing often have the best social mobility.  Inversely, cities with the most affordable housing have the worst social mobility.  California is home to six of the seven least affordable housing markets, though has four of the 11 best cities for upward mobility and job opportunity, including Southern California, according to Kolko’s affordability metric.  (Kolko/Chetty 2015)

High-income metros often have greater influence over planning commissions, and rightfully so at times.  The coastal communities, for example, often deter and vote against new construction, as opposed to lower income metros.  The unique thing about Southern California, is that may of these high-income metros and low-income metros, seem to live in symbiosis.  The best advice to give your millennial seeking the American Dream? Uh, we’ll let you know when we find it.  Until then, we’re open to suggestions.