The problem with real estate surveys

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Published Date 10/13/2017

A recent survey commissioned by prominent mortgage lender found that 53% of Americans prefer a 10% down payment over a 15%, 20% or 30% down payment. The article discussing the survey results goes on to state, “Private mortgage insurance can add a substantial sum to your monthly costs…Putting down 20% may be more ideal for avoiding additional expense.”

The author suggests ways an aspiring homeowner can save money for their down payment, adding this caution: “…before blindly aiming for that 10% down payment, bear in mind the additional expense it entails…. consider whether it truly makes sense to put 10% down…it is wise to adapt your savings plan to put 20% down.”

The article perpetuates the persistent myth that there is such a thing as a “normal” down payment of 20%. It does so in a subtle manner, acknowledging that most buyers today prefer a smaller down payment, then suggesting that those buyers may be neglecting the “additional expense” of mortgage insurance.

While it is true that a buyer’s monthly cost will be lower with a down payment of 20% or more—a smaller loan amount and no mortgage insurance will obviously have lower payments—there is a cost involved in waiting for a real estate market where prices are rising. The median price of a home in the U.S. is $201,900 and is projected to rise 3.1% over the next 12 months. This means that the cost of waiting to buy an “average” $200,000 home today is likely to be $6,000 as the prices rise.

A buyer with enough cash for a 10% down payment can expect to pay monthly mortgage insurance premiums as low as .30%, depending on credit score. Lenders require mortgage insurance to limit their risk when the buyer’s loan is more than 80% of the home’s value. Once the loan balance reaches 80% through appreciation and monthly principal payments, the lender will no longer require this additional protection.

This can happen sooner than one might think. If homes appreciate at 3% per year, a buyer making a 10% down payment can expect to be able to drop mortgage insurance in as little as 30 months.

Hopeful buyers and the professionals who help them should keep in mind that mortgage insurance is not a penalty imposed on someone who doesn’t happen to have enough cash for a 20% down payment. Mortgage insurance is a useful financial tool that can help people of modest means become homeowners sooner, and at a lower cost.

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