Today’s Rates and the Down Payment Debate

AMA6-23-13Is conventional wisdom crippling the housing recovery? It’s almost a given that a homebuyer can expect to produce a down payment of at least 20 percent in order to secure a mortgage. And the more a buyer can put down, the more they can save over the term of the loan. But given the unique circumstances of today’s housing market, that old standard may cost buyers more – and price some hopeful homebuyers out of the market entirely,

It seems simple: the more a prospective buyer can put down, the lower their payments over time, and the better the financing terms. But according to new infographjo produced by LendingTree, the average down payment has dropped by 9.4 percent over the past two years – and the average down payment nationwide is hovering at 16 percent, with some borrowers securing a home with ten percent down or even less.

Those lower down payments open the housing market to more potential buyers, say industry watchers. While buyers with lower incomes and more credit concerns struggle to save up that 20 percent, they’re missing out on the current low interest rates and lower cost homes. By the time they do have that down payment, say financial experts, interest rates will be higher and so will home prices – and that 20 percent won’t have the same value.

Though they’re inching upward, current interest rates remain very

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low, propped up by the Fed.’s buyup of billions in mortgage-backed securities. But the Fed has just announced plans to wind down is artificial manipulation of the marketplace by mid 2014, which means rates will actually reflect the market.

According to a recent Yahoo Homes post, that means that a mortgage secured today at 4 percent with a 10 percent down payment will cost less over the life of the loan than the same mortgage at 20 percent down in a year or so, when rates could be at 7 percent or more, and home prices will have risen, too.

Lending standards are tighter now than in the years around the housing collapse of 2008, and the Qualified Mortgage Rule soon to take effect establishes some specific criteria for ensuring that mortgage holders can actually carry the arrangement. But, say housing industry experts, that doesn’t mean lenders eager to close a mortgage deal won’t finance a home with a down payment of less than that magic number of 20 percent.

Of course, all of this requires a certain amount of speculation based on current trends in the market. But because the current housing market is unique in some ways, challenging the conventional assumptions about down payment amounts can also create unique opportunities for investors following Jason Hartman’s recommendations for building wealth with income property on a fixed rate mortgage. (Top image: Flickr/CathleenFisher)

Sources:

Karmon, Jennifer. “Who Puts 20% Down on a House? Not Nearly as Many as You Might Think.” Yahoo Homes. Yahoo.com. 21 Jun 2013/

Miller, Peter L. “Downpayment Debate Flares Again,” LendingTree Mortgage Advice. LendingTree.com, 26 Apr 2013

Read more from The American Monetary Association:

Cash Buyers Win in a Hot Housing Market

The Fed’s Securities Buyup Ends: Why It Matters

The American Monetary Association Team

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