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Suze Orman’s standard home buying advice has long been to save for a 20% down payment.
But today’s real estate market is anything but standard.
With low housing stock and historically low mortgage rates today, demand for housing has far exceeded supply, causing housing prices to skyrocket. And that caused Orman to adjust his advice.
âI’ve always had a rule of thumb that you should put at least 20% less so you don’t have to pay PMI, which is private mortgage insurance,â says Orman, the well-known personal finance expert, author and host of the âWomen and Moneyâ podcast. But now she tells NextAdvisor that if you really want to own a home now, you can save 10% less – with a few important caveats. You still need a fully funded emergency fund, no credit card debt, and not to skimp on retirement.
What to do before buying a house with a 10% down payment
To be clear, buying a home isn’t the next step for everyone, even if you’ve saved enough for a large down payment. “If you think it’s gonna do [you] rich in house and poor in money, I would wait then, âsays Orman.
Before moving from tenant to owner, here are some financial goals Orman recommends achieving first:
Emergency fund – Aim to have at least 12 months of savings in an emergency fund.
No consumer debt – Get all your credit cards paid off.
Fully finance your retirement – Don’t let buying a home stop you from reaching your retirement goals or taking full advantage of your employer’s 401 (k) match.
Secure source of income – Make sure you have a stable job and can comfortably pay monthly payments, property taxes and house maintenance.
Cons of buying a home with a smaller down payment
A smaller down payment on your first home may be the right financial decision for you, but you should be aware of the potential additional costs associated with it.
Depending on the type of mortgage you get, you can avoid paying private mortgage insurance if you put down 20% less. The PMI typically costs between 0.2% and 1.8% of your loan balance each year. For an average house ($ 287,148), this could cost you over $ 5,000 per year. But for conventional loans, your credit score also takes into account the cost of your PMI. If you have a high credit score (740+), you may end up with a much smaller PMI payout.
If you invest 10% in a house instead of 20% or more, you may also end up with a higher mortgage rate. Your loan-to-value ratio (LTV) measures the equity in your home, and the more equity you have, the lower your mortgage or refinance rate will be. An LTV of 80% or less will help you get the best rate,
No matter how much you put in, you should be looking for the best deal. The rates and fees you pay vary from mortgage lender to mortgage lender, and comparing offers can help ensure you get the best rate possible.