What’s the Right Down Payment on a House?

Our world is changing in many ways. Uber is changing how we think about cars, so maybe you don’t need one? AirBnB is changing travel, making overnight trips affordable. Unison is a new disruptive mortgage lender redefining how we buy houses. They're willing to match your down payment on a house in return for a share of the profit … when you decide to sell.

Sounds amazing but what does it mean?

For years the traditional down payment for most home buyers has been 20%. The 20 percent down payment is a requirement of Fannie Mae and Freddie Mac. They're government agencies that back or purchase most mortgages that meet lending caps up to $424,100 for most of the US, or $636,150 in high cost locations like California.

There are some commercial lenders who offer loan programs that only require 10% down. And government programs (FHA, VA, USDA) that have lower requirements for a down payment on a house. The problem is they all charge fees for mortgage insurance when you put less than 20% down.

When you’re unable to make a 20% down payment, your monthly financing costs are higher.

• The interest rate for loans is higher when you put less than 20% down.
• Additional mortgage insurance is required by most lenders. Called PMI (private mortgage insurance) and the government programs that allow lower down payments, also have higher costs in the form of fees, higher mortgage rates and/or mortgage insurance with down payments less than 20%.
• Your monthly interest payment is higher because the amount you're borrowing is higher.

What does this all add up to in real dollars and $ense?

How the Down Payment on a House Affects Monthly Mortgage Costs

When buying a house, almost everyone focuses on the money they need to come up with to get to closing. What they don’t always recognize are the higher operating costs that you don't have as a renter. So let’s take a closer look at monthly carrying costs for a $250,000 house with a 30 yr mortgage at four percent (US median house price was $315,000 in 3Q17).

Note: One of my hot buttons is helping people understand the total cost of home ownership. Some of these expenses you have as a renter like digital services while others are new and often overlooked by first time homeowners. My handyman business gave me insight into one of the biggest costs that homeowners ignore – home repairs and renovations, until it's an emergency which will almost always cost you more money.

You might not think saving $300 a month with a lower mortgage payment is worth worrying about. But once you understand the true cost of home ownership, it might look a lot different.

• Utilities ($320/mo) are a moving target. We're using less electricity and water, but in some cases the cost is still driving higher bills to cover repairs to aging infrastructure.
• Digital services ($269) are out of sight, with no end to higher prices. Cell phone costs are crazy compared to land lines with phones that lasted for 10 to 20 years. Cable and Internet costs continue to increase as industry giants compete to dominate the market.
• Home related services ($100/mo) like cleaning, lawn care and pool maintenance are used by many time starved families.
• Home maintenance, repairs and major renovations ($250/mo) are inevitable as many home features have to be replaced after 10 or 20 years. You need to budget 1-2% of your home's value, or $250/mo for a home valued at $250,000.
• Total cost of ownership at $2,646/mo.

The Magic of Home Ownership (and Why You Should Start Saving for a Down Payment Yesterday)

There are many benefits to home ownership like painting the walls any color you want, changing windows and so much more. Probably the biggest benefit and one I think is magical. Your down payment gives you financial leverage as your home’s value increases based on the price of the house, not the down payment. This will make more sense explaining it with dollars and $ense.

Have you seen numbers like this before? They're pretty amazing and one of the least understood reasons to buy a house. It's the biggest investment for most Americans. It's the best way to save for retirement because your mortgage payments are roughly the same as you'd pay in rent.

Buying with Unison Makes the Down Payment on a House Easy (Easier?)

Wondering what's the catch? How does Unison make money when they invest in your house?

Unison's business model is similar to the stock market. They believe that the increase in home value is significant and relatively stable, so they're willing to wait until you sell your home to get their investment back with profits. For matching your 10% down payment on a house, with another 10% … they earn 35% of the capital gains on your home. Before you sit up and say “now way”, let me point out some reasons why you ought to consider this.

• Buy your first house sooner, when you only need a 10% down payment on a house.
• Complete a few remodeling projects quickly, rather than waiting to save up enough money because all your cash went towards the down payment on a house.
• Buy a second home earlier when you only need to save 10% for a down payment without worrying about higher financing costs like PMI.

If you're want to do more research about Unison or home buying/financing in general, here are some ideas for you:

• New Mortgage Calculators for Buy vs Rent
• Finances & Making Sure You're Ready to Buy a House
• Home Buying Basics at Unison.com
• True Cost of Home Ownership
• Invest in Your Home for Retirement Savings

PS This was a new concept for me and I've bought 15 houses. If you want to do more research about home financing options like the one offered by Unison, simply Google “piggyback loans” and you'll find articles like CNBC's article, Is a 20 percent down payment out of reach? How to get around that.