Are you considering buying your first home in the Seattle area? Are you excited about the prospect of owning your own home but don’t have enough money saved up for a 20% down payment? If so, you’re not alone. But it’s important to take a step back and consider all of your options before signing up for a low-money-down mortgage.
According to the National Association of Realtors (NAR), the average price of a single-family home in the greater Seattle metropolitan area was about $700,000 in Q1 2023. That’s a lot of money for any family, so it's important to approach the purchase of a home with careful consideration.
While it may be tempting to jump into the market and buy a home right away using a low-money-down mortgage, at GoodRoots we recommend that first-time homebuyers in Seattle consider the risks and evaluate all of their options.
Let’s take a closer look.
First, what is a “low-money-down” mortgage?
A low-money-down mortgage is one where the homebuyer puts down less than 20% on their down payment. This means they’re borrowing more to finance the home purchase. A good example is an FHA loan, where you can borrow up to 96.5% of the purchase price. Across the US, the average down payment in 2022 was just 6%, meaning many Americans took advantage of low-money-down mortgages to finance their home purchase.
Buying a home with a low-money-down mortgage can make homeownership more accessible, especially for first-time buyers or those with limited savings. However, there are several drawbacks to consider when compared to waiting until you have a 20% down payment:
Higher Interest Rates
Lenders may offer less favorable interest rates for low-money-down mortgages, which could result in paying more interest over the life of the loan compared to a conventional loan with a 20% down payment.
Higher Monthly Payments
With a low-money-down mortgage, you will likely have a higher monthly mortgage payment. A smaller down payment means you are financing a more substantial portion of the home's purchase price, which results in larger loan principal and interest payments. In a high-cost housing market like Seattle, this could add up to thousands of dollars per month!
Private Mortgage Insurance (PMI)
If you make a down payment of less than 20% on a conventional loan or put a minimal amount down on an FHA loan, you will be required to pay for Private Mortgage Insurance (PMI). PMI protects the lender in case of default but adds an extra cost to your monthly mortgage payment. This can cost you hundreds of dollars per month. By waiting until you can afford a 20% down payment, you can typically avoid private mortgage insurance (PMI), and that can save you a lot of money in the long run.
Less Equity = Higher Risk
Home prices don’t always go up! With a smaller down payment, you'll have less equity in the home from the start. So if home prices decline after you purchase with a low down payment, you could find yourself in a negative equity situation, owing more on the mortgage than the home is worth. That puts you in a dangerous financial position, where it is very difficult to refinance the mortgage or sell the home without significant losses. Putting down less than 20% means it will take longer to build a safe equity cushion.
Limited Property Options
Low-money-down mortgages might limit your choices when it comes to properties. Some sellers prefer buyers with larger down payments, and certain property types may not qualify for certain low-money-down programs, especially in high-cost housing markets like Seattle and Bellevue.
Renting your home today and saving up for a 20% down payment can help you avoid the drawbacks of a low-money-down mortgage, as it allows you to secure more favorable terms from your lender with lower monthly payments, no PMI, and potentially better interest rates. It also gives you the flexibility to tap into your home savings for emergencies, and you can move into a rental home without the long-term commitment of a mortgage. In the future, when you’ve saved up enough money, having a 20% down payment gives you greater financial stability and can make you a more attractive buyer to sellers.
Ultimately, your path to homeownership depends on your financial situation, long-term goals, and the specific housing market conditions in your area. It's essential to carefully evaluate your options and consult with professionals like financial planners, real estate agents or mortgage brokers to determine the best path for your individual circumstances.