Do I need to still put 20 percent down to purchase a home

Someone once asked me: Is a 20% down payment standard?

A 20% down payment is anything but standard. Making a smaller down payment does involve some form of mortgage insurance (MI). This is a fee paid to limit the lender's risk when there is a lower down payment.

Conventional loans are available with as little as 3% down. The cost of the mortgage insurance depends on the borrower's credit score. 

Lenders will allow borrowers to drop the monthly MI once the loan-to-value ratio reaches 80%. They will typically require an appraisal (about $500) to show the value, and the loan should have been in good standing for at least the previous 12 months. Different lenders have different procedures, though, so it is worth making a call to them to get their specifics.

Borrowers with lower credit scores may be better off with an FHA loan. The mortgage insurance for a $300,000 FHA loan will cost $216/mo, even with a credit score as low as 580. The disadvantage is that the borrower cannot cancel the MI for an FHA loan. The only way to get out of it is by refinancing into a conventional loan.

If real estate values are going up, a prospective home buyer should buy as soon as possible (even with MI) rather than waiting to save up a larger down payment. If values are going up, say, 4% per year, today's $300,000 home will cost $312,000 a year from today, $325,000 two years from today. There is also the uncertainty about whether mortgage rates will be as low in the future as they are now. Higher rates would obviously increase the cost of owning a home.



Hope this helps!