Value and Cost of 5% Down Payment

It is common to buy a home with the minimum 5% down payment.*

The next question is whether you should purchase with just 5% down payment.  In many cases it is a good idea, and in others, a higher down payment is better.  A common concern with 5% down payment is that you must pay an insurance premium because you have less than 20% down payment.  It is best to look at real numbers to judge the value of moving ahead with the insurance costs built-in.

The one-time insurance fee is added to the mortgage balance so that you don't pay the insurance premium up front.   There is a sliding scale to determine how much insurance you must pay. 

Example:

A buyer purchases an apartment for $400 000. 
5% down payment is $20 000.
The mortgage insurance premium is 3.6% of the amount borrowed or $13 680 added to the total mortgage.
The insurance adds $61.90 to the monthly mortgage payment. 
The total monthly mortgage payment is $1781.25/month at a rate of 2.59% amortized over 25 years.

It will take approximately 15 months of paying $1781.25/month to pay off the equivalent of the $13 680 insurance premium.  That is a great deal if you consider the amount you are paying in rent during that time - it is likely more than $13 680 over 15 months!

Also, most people cannot save from 5% down payment to 20% down payment or $60 000 in 15 months to eliminate the insurance premium.  Again, during that saving time, you are likely paying hefty rent rather than building equity in your home.

Based on the numbers I have shown in this blog, 5% is a good option.  And indeed it is for many people.  However, the decision to buy real estate involves many factors, not just one comparison. This blog gives you some insight, but it is important that you meet with a professional mortgage broker who will strategize with you on your best plan. You can also consider my comments from the August 15 Blog.

*Please note that there are many cases where you will be required to pay more than 5% down payment.

20% Down Payment Offers Advantages

Important question made by hone buyers:   How much down payment do I need?

The answer depends on a number of things and each person's situation is unique.  This blog entry explains why some buyers save up for 20% down payment.

You need a minimum of 5% down payment in most cases to buy real estate, but some people save 20% because the mortgage rules change when you increase your down payment from less than 20% to greater than 20% down payment.  Let me illustrate by example why 20% down payment offers advantages.

Purchase Price:  $400 000
Interest Rate:  2.69%
Approximately $60 000/yr income to qualify

Down Payment of 19.5% or $78 000		Down Payment of 20.5% or $82 000
Amortized for 25 years		Amortized for 30 years
One time default insurance paid and added to mortgage:  $5700		No default insurance payment  required
Payments of $1500/month		Payments of $1285/month

The difference in monthly mortgage payments works out to $215/month 

Government rules allow those with greater than 20% down payment to amortize over 30 years.  In contrast, those with less than 20% down payment can only amortize for a maximum of  25 years.  This can make quite a difference in monthly payments as shown.

In addition, you can avoid mortgage default insurance by saving for 20% down payment.

In some cases, it will make better sense to make a 5% down payment and in some cases, it will be better or essential to have 20%.  The important things is that a buyer analyze their situation with a professional mortgage broker whom them trust to make their decision on the size of their down payment.

Note:  This blog applies to the case of owner occupied properties.