Opinion: Low Down Payment Mortgages Make It Possible To Buy A Home In A High-Rate Environment

By SETH APPLETON

We have all seen the headlines. After years of homebuyers growing accustomed to a 30-year mortgage rate as low as 3%, 2023 saw fluctuations between 6% and 8%, with higher rates persisting into 2024.

Last October, rates reached the highest levels in 23 years, leading many prospective homebuyers to wonder whether they are priced out of the housing market. However, what many renters flirting with becoming first-time homebuyers may not realize is that mortgage rates are only one aspect of affordability, which should be viewed as a three-legged stool: home price, mortgage interest rate, and down payment. Purchasing a home now can still be within reach with a low down payment mortgage.

In certain areas of the country, high mortgage interest rates have cooled the trajectory of home price appreciation, which could be a silver lining for prospective homebuyers. First-time homebuyers may have a better chance of having an offer accepted when fewer buyers are making offers. As a result of home sales dropping 18.7%, from 2022 to 2023, making it the weakest year in sales since 1995, the national median home price increased less than 1% in 2023, a significant slowdown from the 41% increase from 2019 to 2022.

As we sit in the spring of 2024, the slowdown in home price appreciation may not last for the long term, as more competition may drive prices up when interest rates start to come down.

The interest rate for a 30-year fixed-rate mortgage has been hovering between 6.5% and 7% for several months. While Fannie Mae currently predicts rates will slightly decrease by the end of the year, the housing market will continue to face headwinds from high home prices and limited supply. Economists do not expect sales activity to return to 2019-2021 levels, but rather predict a slight increase in sales relative to last year.

In our current housing market, saving for a large down payment seems nearly impossible for many. As outlined by research from the National Association of REALTORS®, saving for the down payment is considered by prospective homebuyers to be one of the top obstacles to achieving the American Dream, buying a home. This is due to a myth that a 20% down payment is required to purchase a home – it is not. Last year, the average down payment for first-time homebuyers was 8%.

So, how does a first-time buyer become a homeowner without a 20% down payment? Fortunately, private mortgage insurance (MI) allows homebuyers to put down as little as 3% to purchase a home and qualify for a conventional mortgage. In the current market, where housing prices are holding constant, it’s a helpful option to buy now, lock in housing costs at a sustainable monthly payment, begin building wealth and equity, and if rates drop in the future, lower interest costs by refinancing. Private MI is also only a temporary cost, since it can be canceled after 20% equity is established and is automatically terminated after 22% is reached.

While private MI may be the best low down payment option for many prospective homebuyers, there are also low down payment mortgages backed by government programs that might suit some borrowers, including those through the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA).

An FHA-backed mortgage can be obtained with 3.5% down, though other costs may make it more expensive when compared to a conventional mortgage with private MI. For example, a 2023 Urban Institute report found that private MI is a more affordable option than FHA loans for certain borrowers, including those with higher FICO credit scores. In addition, the most used form of private MI features a monthly payment until cancellation or termination, meaning no extra funds are added at closing, whereas an FHA loan requires an upfront premium and an annual premium that persists for the entire life of the loan.

While interest rates do impact monthly mortgage payments, it is important to keep in mind the old adage of “date the rate, marry the home.” If you find a home for sale that you fall in love with and you can afford the monthly payments now, it might pay to strike while the iron is hot as you can always refinance if mortgage rates drop.

The bottom line is that despite headwinds in the housing market, 2024 may be an opportunistic time to purchase a home, and with private MI, borrowers don’t need to make a large cash down payment to affordably achieve the American Dream of homeownership.

Seth Appleton is president of U.S. Mortgage Insurers, an association representing the nation’s private mortgage insurance companies.