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Everyone knows that now is an excellent time to move up: mortgage rates are at historic lows, and property values in most areas of the country are continuing to recover. But what if you find that your property hasn’t yet appreciated enough for a large down payment on your dream house? Are you out of luck?
The definitive answer, as with many other questions in life, is “That depends.” Assume for a moment that your home is likely to sell for a price that will pay off the existing mortgage balance and the agent’s commission, but only $10,000 in addition to that. There’s not much you can do with so little cash—or is there?
There are many financing options available for cash-strapped buyers. FHA has been a low-down payment mainstay since 1934. Currently, FHA requires a down payment of just 3.5%—but there are some disadvantages. There is an up-front mortgage insurance premium of 1.75%, added to the loan balance and there is a monthly mortgage insurance premium (currently .85%) that will be in place for the life of the loan.
Like its FHA counterpart, Fannie Mae loans also requires mortgage insurance, but there are two important differences: first, there is no up-front premium as there is with the FHA loan, and the monthly insurance is cancelable once there is enough equity. That would mean that the payment on a $400,000 home could drop by as much as $500 when the mortgage insurance disappeared.
This is an important difference. If the market appreciates at a modest 4% per year, the 3% down payment you made at the beginning would turn into 20% equity in less than four years.
You may remember from buying your home that you needed more cash than the required down payment; you had to pay closing costs. For a purchase with a 3% or 3.5% down payment, the closing costs can be nearly as much as the down payment itself. This could mean $20,000 or more to buy a $400,000 home.
If your present home is light on equity, you’re going to have to find some creative ways to fund your new home. Here are 4 suggestions:
You may also think about waiting to get more equity in your home as it continues to appreciate. This is a reasonable approach, but keep in mind that as your home goes up in value, the home you’d want to buy is doing the same thing.
When buying and selling a home at the same time, you need to equip yourself with knowledge that wasn’t needed when you bought your first home. Click the button below to download our latest ebook.
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest, and have been doing so since 1992. Contact us today with any questions you have about mortgages.
Whether you’re buying a home or ready to refinance, our professionals can help.
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No Obligation and transparency 24/7. Instantly compare live rates and costs from our network of lenders across the country. Real-time accurate rates and closing costs for a variety of loan programs custom to your specific situation.