There are several important factors when it comes to getting a great mortgage for a new home or refinance, and one of the biggest is the down payment. While you obviously want to get the best mortgage rate possible, the amount you spend up front on your down payment is generally the single largest bulk spend during this process.
At City Creek Mortgage, we can help with all down payment-related areas. Unfortunately, a number of misconceptions have formed in the mortgage world surrounding down payments, and these often misinform buyers. With that in mind, let’s look to debunk a few of these down payment myths.
10 Percent Minimum Requirement
According to a study by NAR, well over half of first-time homebuyers are convinced that without a 10 percent down payment on the principal loan amount, they will be totally blocked from obtaining a mortgage for a new home. Simply put, this is false.
Average down payments for all loans today range between 5 and 10 percent of the principal total, with some programs offering down payment options as low as 3 percent. There are even some special options that come with no down payment requirement whatsoever. An assumption that you can’t get any kind of mortgage without 10 percent down could keep you from finding a lot of great home options.
Mortgage Insurance Requirement
Another related myth is that if you don’t have 20 percent to put down up front, you’ll automatically be required to purchase private mortgage insurance (PMI). But again, there are several loan programs that do not require this, including VA loans and other types – some with no PMI and others with significantly reduced rates.
Private Mortgage Insurance Myths
Another myth about PMI is that it protects the buyer, their home or a potential foreclosure situation. This isn’t the purpose of private mortgage insurance – rather, it’s to protect the lender from default on the loan. There is no foreclosure protection. Also, be sure you don’t mix up PMI with homeowner’s insurance, which is indeed for the buyer and protects your physical property.
Another big misconception with PMI is that it cannot be canceled, but this is patently untrue. PMI is only in place to protect a lender when less than 20 percent equity has been paid or built up in the home – even if you don’t put 20 percent down up front, you’ll build this level of equity at some point during the mortgage. At this point, PMI can be removed in most cases. It will be automatically cancelled when your balance reaches 78 percent of the original value, but you can request the cancelation sooner in writing if your home value has gone up enough.
For more on the down payment process, or to learn about any of our mortgage services, speak to the pros at City Creek Mortgage today.