Insurtech company lemonade shared some important information regarding real estate down payment.
team lemonade ((NYSE: LMND) writes One blog post states that when someone says they are saving for a house, they are really saving for a down payment. The Lemonade team points out that it is fairly rare for someone to “arrive with the full value of a property in cash”. However, this could actually happen a lot more in the current “feverish” property market, claims Lemonade.
The Insurtech The company adds that a down payment is the large amount of funds people use to buy their homes. They then pay the remaining amount through manageable monthly payments (facilitated or supported by a mortgage loan). Lemonade explains that this can take anywhere from 20 to 30 years before you can actually own the property.
For many people, the down payment is the “real hurdle on the road to home ownership,” claims Lemonade, adding that monthly mortgage payments could actually be what someone in the same place could pay as rent. To get to this point, “a prospective buyer must first get that down payment upfront, which could mean they have at least $ 30,000 in the bank,” the Lemonade team explained.
Lemonade’s blog post goes on to say:
“The more you invest in your down payment, the better your interest rate can be … the less you borrow, the less you have to pay back and you owe less total interest. Mortgage lenders and banks usually offer better interest rates if your loan-to-value (LTV) ratio is lower. Your credit-to-value ratio (expressed as a percentage) is how risky banks are before they approve you for a home loan. “
LemTheNade’s blog also mentioned that a larger down payment also “adds to your home – the unborrowed value of your home that you can then borrow for refinancing, but at a lower interest rate.”
According to Lemonade, a down payment of 20% has clear advantages. However, the insurance technology firm makes it clear that “it’s by no means what you need to put down”. According to Housing Wire, the average down payment on a property or house over the past 5 years has been “5% to 7%,” according to Lemonade’s blog.
The company stated that the type of loan you choose “has an impact on how much you wager (and how long the loan lasts)”. For example, a conventional or traditional loan has “a minimum 3% down payment and is either 15 years or 30 years long,” noted Lemonade, adding that “a Federal-Housing Association (FHA) loan requires a minimum 3% down payment. 5% has payment. “
As noted on the company’s blog, a “lower down payment means you can buy a home sooner and have cash for other expenses like repairs and home improvement.”
However, a lower down payment “will increase your monthly mortgage payments and you will likely need to get private mortgage insurance,” explained the Lemonade team.
Lemonade added that if you can’t make a 20% down payment, your lender is likely to let you pay for private mortgage insurance (PMI). As the company notes, this may be due to the fact that your bank or lender is “less likely to see someone putting less than 20% on a riskier loan and wanting insurance in case you can’t make your mortgage payments”.
Lemonade further noted:
“PMIs account for around 0.5% and 1% of the mortgage (annually), with these charges included in the monthly mortgage payments. You can lower the PMI when you reach 80% of your home equity. “
Lemonade also mentioned that you may have worked hard to save for that deposit. However, the company makes it clear that it is important to remember that a bank does not provide a mortgage plan “without a certain amount of money in your bank account”.
“Banks and lenders, also known as cash reserves, want you to be able to make your monthly payments for at least the first two to three months. You will need to demonstrate that you have cash, available in either checking or savings accounts (your bank may also agree to funds in the form of stocks, bonds, 401 (k) s and other financial instruments). ”
For example, if your monthly mortgage payments are around $ 1,500, then your lender may want to “see at least $ 3,000 available,” Lemonade explained.
The company also found that not only do you have to make your monthly mortgage payments on a regular basis. There are also “closing costs, which include property insurance, homeowner insurance, home inspection and more,” Lemonade added.
Zillow announces that your closing costs “will be between 2% and 5% of your purchase price”. So if you’re buying a property for around $ 250,000, “expect to pay between $ 5,000 and $ 10,000 for your closing costs,” according to Lemonade’s blog.
The lemonade team concluded:
“If you’ve been saving for a down payment but it doesn’t seem to be working, a down payment support program (like an FHA loan or VA loan) can help. These programs provide funding from government agencies, nonprofits, and unions that can act as loans until you move in, or some that you may not even have to repay. Home ownership can seem like a financial impossibility, but it might be closer than you think. “