Home Downpayment

#1 · June 6, 2022, 7:12 pm

Hello again. I have another question.

A friend of mine told me that I have to put at least 20% downpayment for a home purchase so I don't get charged extra on my monthly payments. Is this true?

She also said that she didn't have any money for the downpayment so she took another loan to cover the downpayment. Is this good advice? What is the collateral for this 2nd loan? Thanks in advance

Ferdie Rodriguez has reacted to this post.

#2 · June 6, 2022, 8:42 pm

Your friend is talking about the Private Mortgage Insurance (PMI). If the loan to value ratio (LTV) is greater than 80% (downpayment of less than 20%), then the lender will charge a PMI. If the LTV is 80% or lower (downpayment of 20% or more), lenders don’t charge a PMI.

I can see why your friend is saying you need to have at least 20% downpayment. But you really don’t need to. If you have the money to put 20% down, then go for it. But for some people, 20% downpayment is steep. When buying a primary home (where you’re going to live) using a conventional loan, the typical downpayment starts at around 3%.

Taking another loan for a downpayment may not be a good idea. That loan for the downpayment means you’re going to pay some interest. So that means you’re paying interest for the mortgage, as well as for the other loan. You would need to compare the interest you’re going to pay for that separate loan, versus what you’re going to pay for the PMI.

About the collateral for the separate loan, I’m not sure if the lender can use the house as a collateral (even as a second lien position)—haven’t really heard of that. From what I know, those loans for downpayment are typically personal loans where there’s no collateral.

Personally, I don’t recommend getting another loan for downpayment, especially for primary homes.

However, if you’re doing real estate investing, and depending on your strategy, getting a loan for the downpayment may work. Most lenders typically require at least 20%-25% for investment properties.

Hope that helps. Feel free to ask me follow up questions if you need to clarify something.

Ian has reacted to this post.

#3 · June 6, 2022, 9:14 pm

How much does a typical PMI cost in addition to your monthly mortgage payment?

#4 · June 7, 2022, 12:18 am

It really depends on the loan amount and your lender. I’m not a loan officer, so I would just rely on what other people have told me. PMI typically between 0.22 % to 2.25% of the loan amount. Once you get that value, divide it by 12 to get the monthly $ amount.
Another thing to consider about PMI. You’re not going to pay PMI for the rest of the loan term. You can have it removed when your LTV is below 80%.
If you want to dig deeper on this, the best person to talk to would a loan officer or a mortgage broker.

#5 · June 7, 2022, 12:49 am

Thank you so much! Very helpful information to start with. I appreciate all the help 🙂