Millennials, if you’re thinking about buying a home… just do it.
Buying a home is one of the biggest financial decisions that most of us ever make, so in some ways it makes sense why young people’s first instinct isn’t running to the bank. A data point from the Federal Reserve underscores the differences between the financial trajectory of millennials and those of earlier generations, the Washington Post reported in January. According to the report, when baby boomers hit a median age of 35 in 1990, they owned nearly one-third of American real estate by value. In 2019, millennials with a median age of 31, owned just 4 percent.
However, buying a home early can have a positive effect on your long term wealth and it might not be as out-of-reach as you thought.
Myth #1: I have to save for a 20% down payment
A common misconception is that you have to put 20% down on a home at the time of closing, but that is simply not true. Paying 20% of a home’s cost upfront can be a steep ask, especially when it comes to first-time homebuyers. Instead of waiting, and potentially never saving the 20%, homebuyers can aim to save as little as 3% down, and pay for mortgage insurance. For example, on a $150,000 home, 3% down is just $4,500.
While most borrowers think MI is expensive, it’s actually reasonable when you look at the numbers. Costs vary, but mortgage insurance, in general, is about 0.5-1.5% of the loan amount per year. So for a $250,000 loan, mortgage insurance would cost around $1,250-$3,750 annually — or $100-315 per month. On a $250,000 home, the equity you’d build in just one year (about 6%) is approximately $15,000. That’s five times the return on the highest estimated PMI rate for a loan of the same size.
If you don’t want the added cost tacked on to your monthly mortgage payment, you can pay for PMI upfront. Either way, because you don’t have to save for that hefty 20% down, you can continue to make your money work for you. For example, now that you’re no longer overcommitting your cash flow to a large down payment, you can focus on investing the money, using it to pay off other debts, or putting it back into your home through renovations.
Myth #2: Renting is cheaper than buying a home
Short answer: not really. Owning a home is one of the quickest ways to build wealth in the United States. Homes typically appreciate at about 6% each year. Following the same example, if you bought a home for $150,000 this year, by 2021 the value would increase by 6%. Since 6% of $150,000 is $9,000, in just one year, the same home will be worth $159,000.
And in 10 years? You’ve made nearly $100,000 in equity.
“That’s how older generations built their wealth,” explained PMI Rate Pro Co-Founder Nomi Smith. “Buying a house was one of the first things they did. Younger generations put off owning a home because of the responsibility and because they have the wrong understanding that they have to have a large down payment.”
If you are renting you’re essentially paying someone else’s mortgage.Not to mention, rent prices have skyrocketed over the last couple of years making the cost of renting about the same as a mortgage payment. While there are several costs associated with closing on a home, if you plan to stay put for at least 3 years, buying is a considerably cheaper option than renting.
Myth #3: There aren’t any costs aside from a down payment
A down payment isn’t the only cost you need to save for when buying a home. If you put down less that 20% you’ll need to factor in PMI, although the amount of your payment may vary depending on the type of mortgage insurance you opt for: single, split, or monthly PMI. The Lenders Network outlined some additional costs at the time of closing including:
*A home appraisal which typically costs between $400-$500.
*A home inspection (around $400)
*At least 2 months of mortgage payments in reserves.
*PMI payment (varies depending on single, monthly, or split)
*Closing costs. [Read more: What are closing costs and how much will you pay?]
Myth #4: All mortgages have the same interest rates and PMI
When it comes to mortgages there is no such thing as ‘one size fits all.’ In fact mortgage interest rates can change from day to day, or even several times within the same day. The closing costs and fees mentioned above can vary between lenders.
Most borrowers don’t know that lenders can shop different PMI quotes. Mortgage insurance is quoted on a risk-based pricing model, meaning that your likeliness of defaulting on your mortgage is taken into consideration. Some of these factors include your credit score, how much you’re putting down at the time of closing, and debt-to-income ratio etc. That being said, it’s important that your loan officer quotes all six private mortgage insurance companies to ensure you are getting the cheapest rates possible (PMI Rate Pro allows loan officers to generate quotes from each MI company in just a few simple steps).
Myth #5: Mortgage insurance is the same thing as homeowners insurance
The difference between mortgage insurance and homeowners insurance is who it protects:
*Mortgage Insurance protects the lender in case you default on payments, that’s why your mortgage insurance rate will rise if you make a smaller down payment. Mortgage insurance won’t protect you or act as a ‘bail out’ if you foreclose.
*Homeowners insurance protects the borrower and your physical home in case of a disaster. If your home suffers significant damage from a natural disaster or fire, homeowners insurance will pay you directly for the loss.
While buying your first home is a big decision, myths and misconceptions can delay the process while you miss out on building equity on your investment. Not only will buying a home now save you money compared to renting, mortgage insurance allows you to start the process without putting 20% down. In short: if you’re going to stay put for at least 3 years and are thinking about buying a home… just do it.
About PMI Rate Pro
PMI Rate Pro transforms the private mortgage insurance quoting process with innovative software that provides rates from every mortgage insurer in seconds, saving time and money. By providing accurate quotes for homebuyers in seconds, loan officers are able to win more deals while saving borrowers money on their insurance rates. The company was founded by Nomi Smith and Luke Landau, two tenured mortgage officers who recognized that homebuyers have been overpaying for private mortgage insurance for decades. For more information on PMI Rate Pro, visit www.pmiratepro.com.