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Why 20% Downpayments Don’t Always Make Sense (or Dollars)

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By Brien McMahon

Despite the “doom and gloom” in today’s headlines, in the current economic climate, homeownership is more affordable than ever, thanks to low interest rates and lower home values. For those buyers who manage to have a 20% (or more) downpayment, they believe this will get them the lowest monthly mortgage payment. However, simply because buyers can afford to put down this amount does not necessarily mean they should.

Those buyers who have saved enough to put 20%—or more—down on the purchase of a home may want to consider another approach—preserving some of their cash for savings, investing or other purposes. It may sound counterintuitive, but with today’s interest rates and the competitive pricing of private mortgage insurance (MI), borrowers can retain some of their money by putting less money down on a home—say only 10%—and still get a low monthly payment.

Real estate professionals have a responsibility to all home buyers to help them evaluate their purchasing power based on existing assets as well as future need. The right counsel can help home buyers leverage their current assets while keeping sufficient reserve for any immediate or future financial needs, not to mention all the trips to the local big box hardware store that seem to come standard for any new homeowner.

As a real estate professional, you are perfectly positioned to guide prospective home buyers throughout the transaction process. At the very beginning, it is imperative to look at the borrower’s overall financial picture—taking into consideration current cash flow, debt and all future financial obligations.

Help your borrower think beyond just their interest rate and downpayment, as these are not the only keys to securing the lowest possible mortgage payment. By having a general understanding of the current financing options, you can better understand what your buyer can responsibly afford, which, in some instances may be more than they think.

While you are not a financial advisor, by asking these types of insightful questions, you can help make sure your buyers better frame conversations with their loan officer, thus increasing the value you bring to the table and the likelihood of a positive outcome for all parties.

While in the past the adage was, “The more you borrow, the more you leverage,” in today’s financial times, the scenario is much different. Today, borrowers can leverage private MI to put as little as 5% down on a home and still have a competitive payment. And for those potential buyers who have stayed out of the market over worries of declining property values, they can still purchase a home without funneling all of their available cash into the downpayment. By utilizing this strategy, home buyers are able to leverage their current assets, while still keeping sufficient cash reserve.

So, while putting 20% down on a home doesn’t always make sense (or dollars), buying at a time of high affordability does. And by understanding the current financing options available to buyers, and helping them discuss what those options mean for their downpayment needs or monthly payments, you can help point them in the right direction with their loan officer, overcome their investment fears and make the sale, all while helping them achieve their goals.

Brien McMahon is chief franchise officer of Radian Guaranty Inc.

For more information, visit www.radian.biz.

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