Post # 1
DH and I are not ready to buy yet, but hopefully will be in a couple of years. We were doing great in our savings and were surprised with dental surgery DH needed, so a lot of our savings was thrown to that. As we start preparing to be homeowners, I’ve noticed there is a lot of information on down payments and everyone disagrees on what’s acceptable or best. So…
For first-time homebuyers, what percent down payment do you recommend and why?
What did you choose when buying your first home (or second, third, etc.) and why was it a good/bad choice?
Any general advice is also welcome!
Post # 2
KatiePi: I’ve been a 1st time home buyer 3 times. The first time we put a little down and then paid PMI. This last time, we didn’t put anything down (different husband) and we pay PMI. My county has this nice thing where they will pay your down payment and you pay it back as a 2nd mortgage. It’s only like $60/month. So when that’s paid off our mortgage will actually go down. I’ve had to do this because never in my life have I or will I have thousands of dollars. Now if your situation is different, I’d definitely try to save up the 20%.
Post # 3
KatiePi: We’re in Canada, so the rules might be different. But we will be putting 5% down, we’ll pay CMHC insurance fees, but its minimal (less than $40 a month on a $600k mortgage.) The bottom line is we don’t have 120k to avoid the fees (minimum 20% down payment.) So what difference did it make? We can comfortably afford the payments on the mortgage at the current interest rates and at more than double the current interest rates (we had the broker run a series of numbers for us – 2.5%, 5% and 8%. Because realistically the rates aren’t going to stay this low forever.)
We will be ‘paying’ the mortgage at the 5% level, despite locking in hopefully (it’ll be 2015 when we will close) around 2.5%. All of the extra will go as a lump sum payment, applied directly to the prinicpal, to pay down the mortgage faster and to ensure we aren’t hit with any budgeting surprises when we have to renew the mortgage down the line.
We also budgeted through for vacation savings, house repairs, car repairs, an emergency fund, TFSAs, RRSPs, and all of our regular lifestyle expenses. We didn’t see the point in waiting until we had the full downpayment if we could easily make the payments work.
We will be taking advantage of first time home buyer’s plan and yanking the deposit amount out of our RRSPs.
It’s nearly impossible to buy a detached home here for less than $500k. So buying a cheaper property wasn’t possible. We could buy a condo, but with condo fees being almost equivalent to a mortgage payment we didn’t see the point. And condos here can be stupid expensive as well.
Post # 4
My FI and I bought our first home last year and here’s what I learned from the experience:
– Look on Zillow or another realty website and see what type of house you like and how much it would cost in the are where’s you’re looking to buy. Just remember that home prices are negotiable and chances are you won’t pay as much as the listing.
– Look for a mortgage company and get prequalified for a loan.
– Find a realtor. They can explain everything and how it works. Ours went as far as providing a timeline of what we’ll have to do and when.
– You can put down as little as 3.5% (FHA Loan, restrictions apply). Just remember that until you payoff the first 20% of the purchasing price, you will pay PMI (private mortgage insurance). So, 20% down would be nice, but isn’t necessary. It’s all about finding a balance of how much you can afford to pay upfront and how much you can afford to pay every month.
– Plan on closing costs. These are in addition to your down payment and must be paid at closing.
– Try not to get addicted to HGTV.
Post # 5
The ideal downpayment in the US is 20%. This will avoid you having to pay Private Mortgage Insurance (PMI) which can often add several hundred dollars to your monthy payment which is non-recoverable (i.e. doesn’t go against your mortgage to pay down the balance).
If you don’t put 20% down, your best bet is to put down less, and then to refinance when your equity in your home reaches 20%. This will cost you several thousand dollars at the time of refinance, but having the PMI removed from your payment will save you tens of thousands over the life of your loan.
Post # 6
tinkks: Very informative response!!
Post # 7
Given the current market, I wouldn’t feel comfortable buying a house without a 20% downpayment. I know other people have bought houses with 3-5% down.
Post # 8
I can only give you advise for Canada (BC specifically). For first time home buyer, you can calm use your RRSP toward your down payment without getting tax but you will have to put minimum amount back to your RRSP within the time frame CRA gives you.
Also for downpayment, I would recommened 20% downpayment just so you don’t have to pay premium on top of your mortgage payment and you can get a 30 years amortization mortgage instead of 25 years. Without 20% downpayment, the bank only allow to approve a 25 years mortgage which the monthly payment is higher and you have to paid a mandatory premium to protect the bank?
Being say that, with 30 years mortgage, when your cash flow is easier, you are allow to do a lump sum amount per year (I can’t remember how much now)
Personally, I would only buy a condo or a house instead of duplex or townhouse.
With townhouse, the price is higher than condo and you don’t actually own a piece of land (only % of the lot) and yet, you still have to pay higher strata compares to condo. So I will stick with condo and just slowly save up for duplex/townhouse.
I dont’ mind duplex but it’s annoyinig that you have to buy same insurance as your neighbour. On top of that, if you get a nasty neighbour, you are stuck with it. One of my friend has a nasty neighbour, their side is so dirty that it attract raccon and rat… and the neighbour refused to pay pest control….ended up my friend has to hire soemone to get rid of the problem…
Post # 9
tinkks: this was really great advice, as DH and i are starting to look for houses too and struggling with the down payment. we have enough for 5% and i don’t see us being able to save much more while paying so much in rent… the mortgage with interest for a house in our area will be less than my current rent. :X
Post # 10
20% or more is best, and we’re doing just about 30%. My advice is not to stretch the budget and be house poor. Right now, we have numbers we’re comfortable with, and that’s crucial.
Post # 11
Not in all areas will you pay less than the list price. In the east end of Toronto houses are going for 100k over asking. There are all out bidding wars. My friends are hoping to buy in a particular area (resale) and they’ve been outbid on a number of homes already. And out bid by tens of thousands of dollars.
You really have to look at how your particular market is behaving. Up here the housing market never crashed. It’s still very hot and IMO its totally a seller’s market.
Post # 12
We bought our first home 1.5 years ago. We put 10% down and got a conventional mortgage. It was worthwhile to buy then, even though we didn’t have 20% to put down, because our interest rate was phenomenal.
And yes we pay PMI but it is only $44 per month, which is pretty good in my opinion.
Post # 13
We only put 3% down on a state mortgage program that we qualified for. We bought a house that was well within our budget and got a 30 year loan that we pay extra on principal so that we will be paid off in 25 years. We do not pay PMI because the state program gives you the option, we do pay a slightly higher interest rate but it made more sense for us to do it that way. Like others have said, prepare yourself for the closing costs, we had the seller cover them but with the down payment we still had to have a good chunk in hand up front. It’s great that you are doing your homework now, you’ll be all set when the time comes, good luck!
Post # 14
If you wait to save up 20% but then interest rates go up in that same time then you really aren’t going to benefit too much from not paying PMI plus all the time you spent continuing to rent you were not contributing to paying down your mortgage.
As other posters have mentioned, the cost-benefit analysis of waiting til you have 20% to put down really depends on your market. In a lot of places the market never crashed or is recovering and housing prices are going up. If you live in a place where prices are going up then I think your best bet is to not wait until you have 20%.
For what it’s worth, we put down 5% but went with a special loan where your interest rate is a bit higher but the bank pays all of the PMI at closing. I think our monthly mortgage is still slightly less than it would have been paying PMI instead of the higher rate. However, we will need to either refinance when we hit 20% (by paying down the loan and increasing value) before 10 years or so at which point it will cost us more with the higher interest rate. We figured most people don’t live in their first house for that long so it made sense for us and even if we do want to stay longer we will just refinance. Obviously if interest rates go up we will be out of luck there but that’s why there is so much debate over this topic – it’s really impossible to predict all of the variables which will impact what is the “best” decision, so you just have to go with what is most likely to be the best decision in your situation.
Post # 15
Oh, I forgot to mention something! Plan ahead for property taxes. Our mortgage company required that they accrue our taxes and pay them for us, so these are a part of our monthly payments. Our actual mortgage is less than the rent we used to pay, but our total monthly payment is way more 🙁 Also, when picking the mortgage company, ask their policy on PMI. A few bees have said that they had to refinance to get rid of their PMI when they paid down 20%. Our lender asked that we send a letter when we get to the 20% mark and they will remove the PMI from our payment. Also, the PMI is on the Loan To Value, not purchasing price. So if you make significant improvements to your new home (or the prices skyrocket for some reason), you will only need to pay to get your property appraised to show that the outstanding loan is 80% or less of the current value of the home.