Home buyers taking advantage of low interest rates can put down less money than they think

Meghan Breslin didn’t think she’d become a homeowner at 23. But with a stable job as a computer systems analyst and a committed relationship, the timing was right for her and her boyfriend to make their move from renting in Cherry Hill to owning in Philadelphia. Borrowing money for a home is cheaper than it has ever been.

“When we really did the math, it didn’t make sense to rent,” she said.

When she found a newly constructed townhouse in Philadelphia’s Kensington area, she was prepared to make a 5% down payment. But she got a deal on a government-sponsored loan through a Bank of America program: She’d put 3% down — about $13,000 — and grants would cover closing costs, which saved her about $17,500.

Record-low mortgage rates have been catching the attention of potential home buyers, presenting opportunities for those in positions to take advantage. Households that haven’t lost income during the pandemic and are saving money on commuting, vacationing, and entertainment can find themselves with thousands of unexpected dollars.

“A lot of people we’ve seen have decided to buy a house with that money,” said Jeremy Durkin, senior mortgage consultant at Chester County-based Trident Mortgage Co. “A big sector has more money than ever.”

Low interest rates are making monthly loan payments and higher priced homes more affordable, but potential homeowners have to factor in the up-front costs of buying a property, such as a down payment. Many have trouble accumulating the chunk of money they need to get a loan, a problem worsened by the pandemic-induced recession and the student loan debt crisis.

Tendayi Kapfidze, chief economist at LendingTree, cautions buyers: “Don’t just wake up in the morning and think, ‘I’m going to buy a house because rates are low.’ That’s trouble.”

He added, “There’s not enough attention paid to down payments when people are talking about accessibility to housing. Down payments are actually the biggest obstacle to buying a home — much more than what the monthly payments are going to be.”

A National Association of Realtors survey of roughly 8,200 home buyers released last month found that those who had trouble saving for a down payment cited student loans — the typical amount was $30,000 — as the top reason.

Attempts have stalled among state and federal lawmakers to create tax-free accounts to help prospective buyers save for a house. The city’s Philly First Home program, which gives grants for down payments and closing costs, stopped accepting applications in September. Demand exceeded city funding, and administrators of the program aren’t sure when it will be able to take new applications.

Buyers can ask sellers to help with closing costs or fees, but in today’s market, houses can usually sell without sellers offering such assistance. Some buyers take money from retirement accounts for down payments. Other fortunate buyers use monetary gifts from relatives.

“I see the parents helping more now than before,” said Mikhal Mary, a Realtor with the Mike McCann Team based in Philadelphia.

Hope Katz, counsel manager at the financial counseling nonprofit Clarifi, said low interest rates are spurring buyers to enter the market as soon as possible — sometimes before it makes financial sense for them. Some clients don’t really want to be or can’t afford to be homeowners, she said, but think that’s a step they have to take at a certain point in their lives.

“Sometimes I think it’s scary,” she said. “I watch some of these people and think, ‘Why are they buying a home?’ ”

» READ MORE: Struggling to save for a down payment? Your county government might be able to help

A lot of people don’t have the savings to afford more than 3.5% for a down payment, especially because of how much debt they have, she said. Fortunately, buyers can put down as little as 3% if they qualify for government-sponsored loans, leaving homeowners with more money for the expenses that come with owning property.

Putting down 20% — a target for previous generations and the threshold at which most buyers don’t need to pay for mortgage insurance — “with today’s economy a lot of times is not realistic,” Katz said.

According to the National Association of Realtors, the median down payment nationwide in 2019 was 12% for all buyers and 6% for first-time home buyers. In 1989, the median down payment for all buyers was 20%.

Most buyers who put down less than 20% must pay for private mortgage insurance, monthly payments meant to protect lenders in case buyers default on their loans. The cost depends on factors such as credit scores, but homeowners can expect to pay roughly $30 to $70 per month per $100,000 borrowed, according to government-controlled mortgage financier FreddieMac. Payments can stop once homeowners reach the equivalent of 20% down.

“You don’t need to have 20% saved up to buy a house. People really still think that,” said Durkin, of Trident Mortgage Co. “If you want to buy a house and you only have a few thousand dollars, we can still make it work many times.”

Some buyers who meet certain income qualifications can get help with down payment or closing costs through mortgage lenders. The Pennsylvania Housing Finance Agency, county governments, and others offer loans for first-time home buyers. Downpaymentresource.com is a database of such programs.

For years, the “overwhelming majority” of clients that come to Bill Festa, president of the Pennsylvania Association of Realtors and owner of William Festa Realty in Philadelphia, have put 3%, 5%, or 10% down, he said. He said a large portion of his sales require sellers to contribute to down payments or closing costs.

“So what that is saying is that buyers are a little more cash poor,” he said.

But an upcoming report by LendingTree found that nationwide, the share of home buyers who paid 20% or more for down payments has increased during the pandemic — from 36% in winter 2020 to around 48% in November. Homeowners who put 20% or more down can pay off their loans more quickly and can pay less per month. In Philadelphia, the share rose from 40% before the pandemic to 53%. Kapfidze, LendingTree’s chief economist, said the dichotomy is further evidence of an uneven economic recovery.

» READ MORE: Philly expands down-payment assistance program that will give $10,000 to first-time home buyers

“There’s a lot of people doing very badly, but there are a lot of people doing relatively well,” he said.

Mary, the Philadelphia Realtor, said that most of her buyers are putting down 3%, 5%, or up to 10%, but that clients include those looking for homes in the $200,000 range and those looking in the $800,000 range, for which 3% down is still $24,000.

Caitlin Beck, a Realtor at KW Philly and lead of the Lock & Key Group, will buy her first home this month to take advantage of low mortgage rates. Many of Beck’s clients also are first-time home buyers. Of her buyers, three in four choose to put 3% or 5% down. They’re choosing lending programs that allow this range of down payments, she said, “because why not?” Less money down means more to pay for furniture, repairs, and upgrades.

“It gives you that flexibility,” she said. “And [the amount] doesn’t scare you as much.”

Aspiring homeowners should look for the help available to them based on their circumstances, Beck said.

“There are benefits to putting more money down,” she said, “but it’s not your only option.”