Skip to: Content
Skip to: Site Navigation
Skip to: Search


The Simple Dollar

Don't have a payment? You should rent, too.

Down payments are part of the home buying process. But if you don't have the cash in hand, you may be required to buy private mortgage insurance. That expense is going to add up. You might actually be better off renting.

By Guest blogger / August 17, 2012

Rachel Pita, a tenant at 349 Pleasant Street, a 200-unit apartment complex, sits on the front steps of her building as she attends a meeting of a group called 'Malden Tenants United' who are fighting to battle proposed rent increases in Malden, Massachusetts in this June 2012 file photo. If you don't have a down payment, however, renting may still be your best bet.

Jessica Rinaldi/Reuters

Enlarge

When a person arrives at the point in their life where they desire home ownership, that person often doesn’t have 20% of the cost of the house they’re eyeing.

Skip to next paragraph

The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.

Recent posts

In our area, for example, a nice, recently-built family home with several bedrooms will set you back at least $150,000. 20% of that is $30,000. For many people who are recent college graduates and are facing student loans, car loans, an entry-level salary, and the difficulty of adapting to adulthood, $30,000 in the bank seems like an imposing goal. In other areas, that amount can be quite a bit higher.

The itch for home ownership often comes from living in an apartment (or something similar) and realizing that the place is a little small for the family you want to have – and perhaps not the most family-friendly place, either. I remember the apartment building I lived in during my late college years. There were a few families there, but there were also apartments full of partying college students who would blast their music at two in the morning and sometimes party to excess. The police were called more than a few times (not on me, thankfully, but on my neighbors more than once).

That’s the situation a lot of people find themselves in. They’re realizing the value in finding a better place to live, but they don’t have the financial means. The solution, as promoted by their parents and relatives and countless publications and programs, is to go buy a home. That’s the American Dream, after all.

The problem is that if you don’t have enough money for a down payment, you’re going to lose a lot of money.

When you ask a bank for a home loan, they’re going to want to see that you’re serious about the loan. One way they do that is by asking for a down payment. They want to see that you have the financial stability to come up with 20% of the value of the home.

If you can’t do that, you look a little risky to the bank. They’re going to want some insurance against the possibility that you’re going to be unable to pay back this loan. It’s going to be up to you to pay for that insurance.

PMI – or private mortgage insurance – is required by most lenders for loans exceeding 80% of the value of a home. PMI can vary a lot, but it usually comes in at a cost of about 0.5% to 1% of the value of the home per year. So, if you’re borrowing to buy a $200,000 home, you’ll be paying an extra $1,000 to $2,000 a year in PMI. Usually, that’s rolled into your monthly mortgage payment, so you’d be paying an extra $80 to $160 a month.

What do you get out of that? Nothing at all other than the “privilege” of being able to borrow without a down payment.

You don’t have to pay for PMI forever – just until you’ve built up 20% equity in your home. Of course, if you’re borrowing the full amount and making minimum payments, you’re going to be paying the PMI for something around twelve years on a thirty year mortgage.

Your other option, of course, is to get a home equity loan to cover your down payment. So, you get a normal mortgage that covers 80% of the value of the home, and you get a home equity loan that covers whatever else you need. The only problem is that the home equity loan will likely have a higher interest rate and it will also have its own closing costs.

In either case, there’s a significant extra cost to buying a home when you don’t have a 20% down payment. The bank will lend the money to you, but it will cost you.

Don’t get tempted into diving into home ownership without a down payment. If you feel like you need a better place to live but you don’t have the down payment, look for a better rental situation. Don’t start diving into the real estate pages unless you have enough money in the bank to secure the best possible deal for yourself.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on www.thesimpledollar.com.

  • Weekly review of global news and ideas
  • Balanced, insightful and trustworthy
  • Subscribe in print or digital

Special Offer

 

Editors' picks

Doing Good

 

What happens when ordinary people decide to pay it forward? Extraordinary change...

Endeavor Global, cofounded by Linda Rottenberg (here at the nonprofit’s headquarters in New York), helps entrepreneurs in emerging markets.

Linda Rottenberg helps people pursue dreams – and create thousands of jobs

She's chief executive of Endeavor Global, a nonprofit group that gives a leg up to budding entrepreneurs.

 
 
Become a fan! Follow us! Google+ YouTube See our feeds!