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Do You Know How Much Cash You Need to Buy a Home?

By Marilyn Allena, Mary Foster, Aaron Morse, Daniel Tripodi and Joanne Ares-Tabick, Mortgage Loan Officers, Affinity Federal Credit Union

Buying a home is often the single largest investment in a person’s life, so naturally, saving for the down payment becomes a primary financial goal. However, many home buyers are emptying their entire savings on closing day – a mistake that puts many in financial danger.

So how much money do you really need for a down payment? It all comes down to understanding the options at your disposal and your financial comfort level.

It’s time to debunk the myths of PMI

Private Mortgage Insurance (PMI), which adds a fee to your monthly mortgage payment when the down payment is less than 20% of the home’s purchase price, scares most home buyers into putting more money down than they really need.

If you still view PMI as something to avoid at all costs, your thinking is outdated. Many confuse PMI with MIP (Mortgage Insurance Premium), a permanent, up front monthly fee associated with FHA loans. PMI eventually goes away, either from reaching 78% of the home purchase price from your mortgage payments or, depending on values in your area, you can ask your lender to reappraise the property at your expense to see if you can eliminate your PMI.

There’s nothing wrong with having the ability to borrow more and put less down – not everyone is in the kind of financial standing to spend a large sum of money on the home buying process with plenty left to spare. Plus, there are upsides to PMI: A portion of it may be tax deductible, and some pricing models offer better, lower interest rates to those who opt for it. Please consult with your tax advisor for additional tax information.

Ask yourself: What if?

Understanding how much down payment you need starts with determining how much you’re willing to spend on a property and budgeting out from that price point. That budget should always include a cushion of “what if” money – a reserve for the many things that could potentially go wrong with your home, like roof repairs, new water heaters, and more.

Take the 2008 housing collapse, for example. Homeowners who felt the need to pour 20% equity into their property woke up with 5% equity, ultimately losing thousands of dollars to the bank.

These “what if” scenarios are a prime reason to never spend every dollar you have at closing. If you don’t plan accordingly for the unknown, you risk depending on credit and paving a bad road of poor financial health.

The best rule of thumb is to have at least three to six months of housing expenses in the bank in case of emergencies. In addition, home warranties are a great investment to help cover the costs of faulty home appliances.

Use creativity in the home buying process

With an all-star realtor, lawyer and mortgage loan officer (MLO) team on your side, you can uncover creative ways to save money on your closing day. Although it can be difficult, lawyers can negotiate a seller’s concession, where the seller will pay up to 3% of your closing costs. This can be negotiated during attorney review with both the seller and buyer’s realtors involved.

You should also be aware of the perks associated with your lender. Affinity has just launched the Home Advantage program for example, which gives our members cash back at closing. 

A pre-approval and trusted mortgage loan officer matters

Unfortunately, we are in a market where a larger down payment can win over a seller – but having a pre-approval strengthens your offer. By going through the underwriting process and verifying income and assets, the pre-approval is the ultimate “good deal” seal of approval. Not all banks will offer pre-approvals anymore, so it’s an important factor to weigh as your researching lenders.

Affinity does offer pre-approvals, and our team of Mortgage Loan Officers works directly with you to achieve your goal of home ownership. By being transparent with your MLO about your full financial picture and obtaining your pre-approval, you’ll be well on your way to purchasing your dream home without jeopardizing your financial health. All loans are subject to approval.

Additional Resources:

Affinity’s Home Advantage Program

Learn More About Affinity’s Free Home Buying Seminars

Affinity Mortgages: Great rates. No fees. No surprises.

7 Mistakes to Avoid Once You’ve Been Pre-Approved for a Mortgage

How to Buy and Sell a Home Without Losing Your Sanity

Make Your Dream Home a Reality with a Mortgage t

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