Why should I put down 20% when I can put down 5% and save more per month? When my wife and I had our real estate business, this was a question my wife and I heard a lot while discussing how our clients were saving for a down payment. Our reply typically was, “Why should you pay PMI, or Private Mortgage Insurance?
OK, time for a quick teaching lesson. When you go to buy a house, the banks determined that a safe buyer is a person saving for a down payment that is 20% of the home’s value. Therefore, if you put down less than 20%, you will be charged a monthly fee often referred to as PMI.
Be aware that this insurance isn’t for you. Rather, it is for the bank. They are insuring themselves against the possibility that you will default on the payments and the bank will be required to seize the house.
If that doesn’t put things into perspective for you, let’s do a quick history lesson now and talk about the housing crisis.
The 2009 housing crisis.
As you will recall, the housing market came to a screeching halt because people bought more house than they could afford.
What happened again? Well, they used the easy lending requirements at the time to qualify for more money. They put down less, bought nice furniture, and took lavish vacations. Then, they lost their job or had a few rough months — and boom — they couldn’t make the mortgage payments anymore and the bank took the house.