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The standard home buying advice of Suze Orman has long been to save up for a 20% down payment.
But today’s real estate market is anything but standard.
With low housing inventory and today’s historically low mortgage rates, demand for homes has far outstripped supply, which has led to skyrocketing home prices. And that has caused Orman to adjust her advice.
“I’ve always had a rule of thumb that you should put at least 20% down so you don’t have to pay PMI, which is private mortgage insurance,” says Orman, the well-known personal finance expert, author, and host of the podcast “Women & Money.” But she now tells NextAdvisor that if you really want to become a homeowner right now, you can put 10% down — with a few big caveats. You still need a fully-funded emergency fund, no credit card debt, and to not be skimping on retirement.
What to Do Before You Purchase a House With 10% Down
To be clear, buying a home isn’t the right next move for everyone, even if you have enough saved up for a sizable down payment. “If you think that it’s going to make [you] house rich and cash poor, I would wait at this point in time,” Orman says.
Before you make the transition from renter to homeowner, here are a few financial goals Orman recommends meeting first:
Emergency fund – Aim to have at least 12 months of savings in an emergency fund.
No consumer debt – Have all of your credit cards paid off.
Fully fund your retirement – Don’t let purchasing a house get in the way of reaching your retirement goals or taking full advantage of your employer’s 401(k) match.
Drawbacks to Purchasing a Home With a Smaller Down Payment
A smaller down payment on your first home can be the right financial move for you, but you should be aware of the potential extra costs associated with it.
Depending on the type of mortgage you get, you can avoid paying private mortgage insurance if you put 20% down. PMI typically costs anywhere from 0.2% to 1.8% of your loan balance annually. For an average home ($287,148), that could cost you over $5,000 a year. But for conventional loans, your credit score also factors into how expensive your PMI is. If you have a high credit score (740+), you may end up with a much smaller PMI payment.
If you put 10% down on a house instead of 20% or more, then you’re also likely to end up with a higher mortgage rate. Your loan-to-value ratio (LTV) measures how much equity you have 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,
Regardless of how much you’re putting down, you should be shopping around for the best deal. The rates and fees you pay will vary from one mortgage lender to the next, and comparing offers can help ensure you’re getting the best rate possible.