First-Time Buyers: How Much Down Payment Do You Really Need These Days?

For someone who is thinking of buying a first home, the idea of saving enough money for a 20 percent down payment can be daunting. The good news is a first-time buyer can purchase a home for a little as 3 percent down – and even no money down in some cases.

“The narrative that in order to buy a house in America today you need 20 percent down is just not true,” says Marietta Rodriguez, vice president of national homeownership programs and lending for NeighborWorks America, a national nonprofit focused on community development and homeownership. “There are a lot of different products that offer low down payment options.”

If you otherwise qualify for a mortgage, you can qualify for one with a lower down payment, though some options are only available to those with good credit. But you will pay more. That’s partly because if you pay less upfront, your mortgage balance is higher. Another reason is if you don’t make a minimum down payment of 20 percent, you will usually be required to pay private mortgage insurance.

PMI, as it is commonly known, protects the lender if you default on your loan. On a conventional loan, it’s usually added to your monthly payment. For loans offered by the Department of Veterans Affairs, the U.S. Department of Agriculture and the Federal Housing Administration, mortgage insurance is handled differently.

“The less you put down, the higher the mortgage insurance is,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area. “With 5 percent down, the mortgage insurance is quite high.”

The cost of private mortgage insurance depends on your credit score and the size of your down payment. Freddie Mac estimates the cost at $30 to $70 per month for each $100,000 borrowed. The Freddie Mac website calculates that if you buy a $200,000 home with 10 percent down with a 30-year fixed rate of 4.5 percent, you’ll pay $80.75 a month in PMI (at a rate of 0.51 percent), in addition to the $962 monthly principal and interest payment (taxes and insurance are added on top of that). With 20 percent down, you’ll pay $810.70 per month.

If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment. With 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 home. With FHA loans, PMI lasts for the lifetime of the loan.

“Anyone with decent credit can get a loan,” Fleming says. “The limiting factor will always be the PMI.”

If you have a choice, should you make a bigger down payment to avoid PMI? It depends on your personal circumstances. You need to make sure you have enough cash on hand for closing costs and repairs. Some lenders will require a certain level of reserves before they will grant the mortgage.

“There’s really no hard and fast rule out there,” Rodriguez says. “Inasmuch as they have a choice, and have something to put down, they can run through different scenarios.”

Even with no down payment, homebuyers still need some cash to cover closing costs and upfront costs, such as a year’s worth of taxes and insurance. Some loan programs allow buyers to use a contribution from the seller or a gift from family for closing costs and down payments, but others do not.

“That means you need to be putting money aside,” says Sandee Rains, a financial education specialist in Tampa, Florida, with the nonprofit ClearPoint Credit Counseling Solutions.

If you’re considering buying a home, it’s smart to meet with a mortgage officer or broker before you start looking at property. “Sit down with somebody who can show you what all the costs are really going to be,” Fleming says. A good mortgage broker can help you weigh your options and decide how large a down payment to aim for, as well as which loan program is the best option.

Rodriguez suggests consulting a financial counselor who can examine your financial life in its entirety. “It’s really to help you plan your financial future,” she says. “Homeownership might be only one of those goals.” More here.

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Mortgage rates remain near 10-month lows

Two months ago, when the Federal Reserve announced it was raising its benchmark rate, most observers expected mortgage rates to start creeping higher. Instead, for the past six weeks, the average for the 30-year fixed-rate, the most popular home loan product, has fallen 36 basis points. (A basis point is 0.01 percentage point.) It is now at its lowest level in 10 months.

Mortgage rates are closely tied to the movement of the 10-year Treasury, and investors lately have been flooding the bond market, driving down yields, so rates on home loans have tumbled.

According to the latest data released Thursday by Freddie Mac, the 30-year fixed-rate average held steady at 3.65 percent with an average 0.5 point, same as it was a week ago.  (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 3.76 percent a year ago.

The 15-year fixed-rate average also was unchanged at 2.95 percent with an average 0.5 point, hovering below 3 percent for the second week in a row. It was 3.05 percent a year ago.

The five-year adjustable rate mortgage average ticked up to 2.85 percent with an average 0.4 point. It was 2.83 percent a week ago and 2.97 percent a year ago.

Sean Becketti, Freddie Mac chief economist, noted that even though bond yields rose slightly this week they remain low and are helping to keep home loan rates down.

“After another week of financial market oscillations driven by rumors of potential limits on oil production, the 10-year Treasury yield edged up 5 basis points,” Becketti said in a statement. “Despite this week’s uptick in Treasury yields, the 10-year is still 54 basis points lower than it stood at the end of 2015.”

Meanwhile, mortgage applications surged as homeowners sought to refinance their loans, according to the latest data from the Mortgage Bankers Association. Rising home values are allowing more homeowners to take advantage of the low rates. More here.

Should Sellers Take Personal Letters From Homebuyers Seriously?

In the competitive market for a home that exists in many parts of the country, more buyers are embracing a novel tool: adding to their offers a heartfelt letter and a family photo in hopes of swaying the seller to choose their bid.

“It is very common these days. It is so competitive out there. I think you’ve got to pull out all the stops,” says Klaus Gosma, a Redfin agent in Seattle. “If all other things are equal, [a compelling letter and photo] could be a scenario that may make a difference. Most people are going to make the logical choice, but some people are going to be more emotional.”

These days it’s not only rare for the buyer and seller to meet during the homebuying process, but the buyer’s agent and listing agent may never meet, doing all their interactions via text message and email. That can make the buyer’s letter the only biographical information the seller receives.

“It does help humanize the buyer in the seller’s eyes,” says Victor Quiroz, an agent with Berkshire Hathaway HomeServices California Properties in the Southern California town of Cerritos. An effective letter is likely to include the buyers’ professions, the ages of their children and a nice family photo. “It doesn’t always work, but it does help a little bit.”

For sellers, the letters add another factor to evaluate when weighing competing offers. But, agents say, letters can be persuasive because sellers are often emotional aboutselling their homes, particularly houses in which they have raised families.

“Every seller is different, and they’re selling for a different reason,” Quiroz says. “Sometimes sellers make decisions not based on financial issues. Sometimes they make decisions for emotional reasons. … I’m actually seeing sellers accept less money and turn down fast closings because they resonated with the buyers.”

In markets where multiple offers are common, such as San Francisco and Seattle, families seeking to buy a home with a mortgage are competing with investors offering all cash and a quick closing. If a seller isn’t in a hurry, and the net proceeds will be the same, a connection with a prospective buyer can influence the seller to accept a longer closing time and a bit more uncertainty.  More here.

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From Aisle to Home: Affordable Storage Items You’ll Want In Your Home

We all have habits we need to break (“I’ll get to it”) and habits we need to acquire (“It shouldn’t take too long”). Now’s the time to get a jump start on maintaining a clutter-free home by organizing the spaces you neglected in 2015. We discovered stylish and affordable storage solutions from the Better Homes and Gardens collection at Walmart to help you keep a tidy home year round. The BHG Live Better Network of Bloggers were challenged to share creative organization and storage hacks and have revealed clever tips and project ideas that will help you tackle clutter and organize chaotic spaces for every room in your home.

1. Tight on closet space? Stacy Risenmay of Not Just a Housewife installed hanging shelves to maximize space in her 1938 cottage. Mix and matchboxesbaskets and bins and be sure to leave room for your favorite collectibles.

2. Taryn Whitaker from Design Dining and Diapers recommends placing all of your utensils in a canister for easy everyday access. Here, she personalizes her Kitchen Storage accessories with simple DIY typography accents.

3. Let Shannon Fox from Fox Hollow Cottage show you how to give your closet the overhaul it deserves. See how she uses the Better Homes and Gardens11-Compartment Hanging Closet Organizer  to create a functional space for all of her favorite items.

4. A pop of color and a touch of personality, this Square 4-Cube Organizer with 4 Collapsible Fabric Bins styled by Jamielyn Nye from I Heart Naptimehelps minimize her son’s messy after school tendencies. More here.