This is how it works: You obtain a conventional loan for 80% of the purchase price of your property, which Fannie Mae or Freddie Mac frequently backs. This gives you access to the most current mortgage rates for your home.
Then you acquire a second loan for 10% (either a home equity loan or a home equity line of credit). Then all you have to do is pay the remaining 10% of the buying price in cash. In some situations, using a piggyback loan can save you money on private mortgage insurance.
The costs of a mortgage with a modest down payment
Even if you’re excited about the prospect of spending less than 20% down on a home, it’s crucial to remember that you’ll end up paying more in the long term.
There’s a reason lenders prefer to see at least 20% down – they want to know you’re putting your money where your mouth is. The lender is investing money upfront for your mortgage because they believe it will be less risky to contribute a considerable sum of your own money to the acquisition.
Your 20% down payment may help you get a better mortgage rate because you will be perceived as less risky. In addition, a lower mortgage rate means you’ll save more money over your term.
Not to mention that a greater down payment means you borrow less, to begin with. No matter your interest rate, the less you borrow, the less you pay in interest. So putting down 20% saves you money over time.
Consider a $200,000 30-year mortgage at 3.92 percent. Using Google’s mortgage calculator, here’s how much you’ll wind up spending in the long term with various down payment amounts:
0% down payment: $340,560
$328,680 is down 3.5 percent.
30% down payment: $306,360
20% down payment: $272,520
That doesn’t even consider the possibility of having to pay a higher interest rate on your mortgage since you don’t have a larger down payment.
Understand that if you do not have 20% down, you will most likely pay mortgage insurance. Of course, there are certain exceptions, but you must include this cost in your total cost when weighing the benefits and drawbacks of obtaining a low down payment mortgage.