The median new-home sales price now sits at $296,200. Many Americans have a hard enough time saving a few thousand dollars for an emergency fund, so coming up with a 20% down payment (a common requirement among banks) isn't financially feasible for most. This is one reason why 3% down-payment mortgages are popular options for homebuyers. But in order to choose the right mortgage loan, you need to know the essentials.
In the video segment below, Motley Fool analysts Kristine Harjes and Nathan Hamilton talk about one downside of these low-down-payment loans: private mortgage insurance (PMI), which will cost you extra each month.
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Kristine Harjes: Wells Fargo, which is the highest-volume mortgage lender, is now offering a 3% down mortgage. So, we thought that it would be extremely helpful for us to let some of our listeners know some details about these 3% down mortgages.
Nathan Hamilton: Yeah. Some people may be out there. They are somewhat popular, and some people may be looking and thinking, "OK, is it right for me?" But one mortgage essential -- essentially looking at Mortgage 101 here -- is this mortgage, just like any mortgage that you're putting down less than 20%, is going to incur PMI, which is Private Mortgage Insurance. What it amounts to, if you want to run the calculations, is generally it's about half a percentage point to one full percentage point. ...
So, I ran it here just to see OK on an average new mortgage, which recent data shows is right around $309,000, PMI would work out to $128 to $257 each month.
Harjes: Which is pretty huge, and that is definitely not something that you want to go into blind when you're considering whether or not this is the type of mortgage that is right for you.
Hamilton: Yeah. If you look at it, the economics behind any business, when you're receiving something favorable from a bank, there's going to be some other fee or some balance to make it financially profitable for each party. In this certain case, when you are taking advantage of low-down-payment options, there are going to be other fees when it comes down to it.
Harjes: Right, because you are somewhat of a higher risk to that lender.
Hamilton: You are, yes.
Harjes: It only makes sense.
Harjes: So, if you are considering one of these types of mortgages and you want to run some numbers and use a calculator, we have these tools available for all of our listeners at fool.com/mortgages. There you can find all of our helpful mortgage tools, including access to highly rated lenders with low rates. You can also see our free guide, "5 Tips to Increase your Credit Score Over 800."