First-time Colorado buyers who financed their home typically financed 95% of their home purchase compared to repeat buyers at 81%. (Photo: Bigstock).

Tom Kalinski, RE/MAX of Boulder

With the cost of real estate today, the 20 percent down rule is no longer so hard and fast.

In fact, Colorado home-buyers typically financed 86% of their home’s purchase price. First-time Colorado buyers who financed their home typically financed 95% of their home purchase compared to repeat buyers at 81%, according to the 2020 Profile of Home Buyers and Sellers recently released by the National Association of Realtors® (NAR).

That translates into down payments of 5 to 14%. And it’s possible to put down even less – for example, Freddie Mac’s Home Possible® mortgage products let eligible homebuyers put down as little as 3%. But what’s the smart thing to do, save until you have 20 percent down and avoid paying private mortgage insurance (PMI)? Or should you gather the biggest down payment you can and bear the extra cost of PMI?

Many experts say the best strategy is the one that gets a big enough down payment and doesn’t jeopardize your finances in the long run. To amass the down payment, first-time home buyers often rely on gifts and loans from family. Among home buyers ages 28 and younger 28% used a gift from a relative or friend to make a down payment, according to NAR.

Lenders accept down payment gifts, but it involves more than depositing a check. The donors need to verify the gift in writing, specifying that it is a gift and not a loan – meaning there is no expectation of repayment at any time. The donor also needs to verify their financial ability to make the donation, and may require a bank statement as proof, reports NerdWallet.com.

Even with the help of generous relatives, chances are you will not have the full 20% down, especially in Boulder County’s real estate market. Since you’re likely to need PMI, there are two important factors to keep in mind as you consider your options, says realtor.com:

On conventional loans, if you put less than 20% down, you’ll need PMI, but only until the principal balance reaches 78% or less of the original purchase price.

FHA loans require mortgage insurance for the life of the loan – so for as long as you live in the home or until you pay off the mortgage.

The cost of your PMI varies based on loan–to–value ratio — the amount you owe on your mortgage compared to its value — your credit score, and the insurer. But freddiemac.com says you should expect to pay between $30 and $150 per month for every $100,000 borrowed.

The good news for those paying that extra monthly PMI payment, it does not have to be for the life of your mortgage. You can adopt strategies to eliminate your PMI, like the following suggestions from Bankrate.com.

Termination strategies
The federal Homeowners Protection Act enables you to get end private mortgage insurance requirements in two ways: get automatic PMI termination at specific home equity milestones, or request the removal of PMI when you reach 80 percent home equity.

And in fast-appreciating home markets like the Boulder’s, when your home value rises to a sufficient level, you will have 80 percent home equity needed to request termination of your PMI.

Prepayment path
You can choose to make extra payments to prepay the principal on your loan, which reduces the balance, and helps you build equity faster and save on interest payments. You may elect to make an extra payment each month – even as low as $50 a month – or you could apply a lump sum toward principal or make an extra mortgage payment each year.

These strategies will reduce total interest paid over the term of the loan and build your equity to 20% faster so you can eliminate your PMI, according to
bankrate.com.

Home price appreciation
If you own your home now, you could have it reappraised to see it has gained enough value to get you to the 20 percent equity level.

Remember, the Homeowners Protection Act has clear rules and protections on private mortgage insurance. Before you sign a mortgage with PMI, get the PMI rules and schedule. Then you can track your progress and develop your strategy to end the PMI payment.

For more information read:
bankrate.com/mortgages/removing-private-mortgage-insurance
realtor.com/advice/finance/down-payment-myths
nerdwallet.com/article/mortgages/down-payment-strategies-first-time-home-buyers
freddiemac.com/blog/homeownership/20170620_downpayment_math.page

By Tom Kalinski. Tom is the broker/owner of RE/MAX of Boulder, the local residential real estate company he established in 1977. He was inducted into Boulder County’s Business Hall of Fame in 2016 and has a 40-year background in commercial and residential real estate. For questions, e-mail Tom at
tomkalinski33@gmail.com, call 303.441.5620 or visit boulderco.com.