Waiting while buyers save for a 20% down payment can be very costly. While you will be required to pay Private Mortgage Insurance PMI, it can be removed when you surpass 20% equity, and you may face increasing interest rates and home prices while you wait which has a major impact on your monthly payment, and overall mortgage costs.

Janet Berry of the Berry Luxury Home Team at Premiere Plus Realty is a noted Naples Florida Real Estate Expert, and the team leader of one of the perennial top real estate teams in Southwest Florida. She says that, although more than 50% of Naples Florida Homes Sales are cash transactions, one common misconception among homebuyers (particularly first time buyers) is that a 20% down payment is required. This is a limiting belief that often adds months, and sometimes even years, to the home-buying process.

“I believe PMI is one of the main reasons buyers think they need a 20% down payment. If you put down less than 20% down, you may be required to pay PMI monthly, but we teach our clients how to remover PMI once the equity in their homes reaches 20% which can save them an incredible amount of money over the term of their loan. ”

— Janet Berry

As their property values increase, and they make payments against the principal amount of their loan, their equity grows rapidly in Naples and Southwest Florida. Most people do not realize that PMI is only required as long as their loan amount represents more than 80% of the value of their home, and they continue paying the PMI. When your equity surpasses 20%, PMI can be removed.

We can save our clients a tremendous amount of money when purchasing a home in Naples by teaching them how to remove PMI when their equity reaches 20%!

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. The monthly cost of your PMI depends on the home’s value, the amount of your down payment, and your credit score.

YOU Must Ask Your Lender to Cancel “Your Private Mortgage Insurance! If You Do Not Ask Your Lender to Cancel Your PMI When You Have Enough Equity, You Will PMI Each Month For The Entire Term of your Loan!

Below is a table showing the difference in monthly mortgage payment for a $250,000 home with a 3% down payment and PMI vs. a 20% down payment without PMI:

The first thing you see when looking at the table above is no doubt the added $320 a month that you would be spending on your monthly mortgage cost. The second thing that should stand out is that a 20% down payment is $50,000!

If you are buying your first home, $50,000 is a large sum of money that takes discipline and sacrifice to save. Many first-time buyers save for 5-10 years before buying their homes.

To save $50,000 in 10 years, you would need to save about $420 a month. On the other hand, if you save that same $420 a month, you could afford a 3% down payment in less than a year and a half.

In a recent article by My Mortgage Insider, they explain what could happen in the market while you are waiting to save for a higher down payment:

“The time it takes to save a (larger) down payment could mean higher home prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.”

The article went on to say,

“Since renters typically devote a higher percentage of their income to housing than homeowners, providing flexible down payment options can help renters with solid earnings purchase a home – and gain a fixed-rate mortgage with principal and interest payments that will not increase over the life of the loan.”

If the prospect of having to pay PMI is holding you back from buying a home today, Freddie Mac has this advice,

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Based on results of the most recent Home Price Expectation Survey, a homeowner who purchased a $250,000 home in January would gain $50,000 in equity over the next five years based on home price appreciation alone (shown below).

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family.