United Guaranty Insights
The Argument Against the Biggest Possible Down Payment
By Susan King, Regional Vice President, Western Region
United Guaranty Corporation
Posted on September 8, 2015
There's a tendency to think of mortgage insurance (MI) as an option that is only for borrowers who lack the savings to make a down payment of 20 percent or more.
In truth, there are plenty of highly qualified individuals and families who have ample savings, but who still choose MI due to the flexibility it offers.
A new article on the Realtor.com news page makes a good argument against home buyers stretching financially to make the largest possible payment on a home.
Of course, a sizeable down payment is a good goal, but in the article "When a Big Down Payment Could Spell Trouble," writer Jamie Wiebe states that putting down too much cash "can actually wind up compromising your quality of life or future savings goals."
The Realtor.com article describes some of the pitfalls of a larger-than-necessary down payment, including:
- Exhausting the borrower's emergency savings. The article quotes Jeff Jones of Longview Financial Advisors on the importance of maintaining enough savings to sustain the family for three to six months to protect against a job loss or an illness.
- Leaving the buyer without savings to pay for new-home costs like hiring movers or buying new furniture. Having some savings available after move-in day can be a better choice than using a credit card or other revolving debt to pay for pressing needs.
- Underestimating closing costs. It's smart to have some extra cash available for closing costs that can account for as much as 3 percent to 6 percent of the purchase price.
With MI, qualified borrowers can buy a home with a down payment of as little as 3 percent of the home's value. MI allows qualified individuals and families to choose the down payment amount that best suits their needs and their budgets—which might be 3 percent, 5 percent, 10 percent, or even more.
Plus, private mortgage insurance may cancel automatically when the principal balance of your loan reaches 78 percent of the original value of the property, and you can request cancellation even earlier—when your loan reaches 80 percent of the original value1.
For buyers who want to know more about the options and flexibility MI can provide, United Guaranty offers free Resources for Home Buyers, including detailed information on payment options, a cost-comparison of renting versus buying, and tips for saving money at closing and over the life of the loan.
The more homebuyers know—even before they start shopping for a home—the more likely they are to find a house that suits their lifestyle and their budget.
1 Refer to the federal Homeowners Protection Act of 1998 for more information on MI cancellation.
Susan King has more than 30 years of experience in the mortgage industry, including sales, operations, underwriting, title insurance, and appraisal management. She was appointed to head United Guaranty's 11-state Western Region earlier this year after serving as Regional Vice President of the Heartland Region for four years. King has been very active with the Mortgage Bankers Association and has served on the Board of Directors of MBA's Illinois Chapter. She holds MBA's Accredited Mortgage Professional (AMP) designation. United Guaranty's West Region includes California, Alaska, Hawaii, Oregon, Washington, Nevada, Arizona, Utah, Idaho, Montana, and Wyoming.
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