Here's Why Ownership Might Be More Expensive for 70% of Millennial Buyers

By: , Contributor

Published on: Feb 04, 2020

A lower down payment means a more expensive mortgage payment.

It's no secret that millennials have been slow to enter the housing market, and new insight into their finances by real estate service Clever helps explain why. More than 25% of millennials who are planning to buy a home in 2020 have less than $1,000 available in savings, and nearly 60% have under $10,000.

It's not surprising, then, that 70% of millennial homebuyers plan to make a down payment that's below the recommended 20% threshold. And that's a mistake that could make homeownership prohibitively expensive for them.

The problem with smaller down payments

When you fail to make a 20% down payment on a conventional mortgage, you're generally slapped with private mortgage insurance, or PMI. But don't be fooled by the name -- PMI doesn't protect you. Rather, it protects your lender in the event that you're unable to pay your mortgage down the line.

What's so bad about PMI? Namely, the fact that it can get expensive, often equaling 1% of your mortgage value, or even more. Generally, PMI is charged as an added fee on top of your existing mortgage payment so that your home becomes costlier to own. And the higher your monthly payment, the greater your chances of struggling to keep up with it. That's why it's generally best to avoid PMI if you can -- even if that means waiting longer to purchase a place of your own.

The upside of waiting

If you have a great job with a generous salary but don't have a ton of savings to apply to a home's down payment, then PMI is often a reasonable solution that allows you to stop throwing money away on rent and start building some equity in a place of your own. But if you're in a position where you're low on savings and you know you don't have a sizable income to tackle a higher mortgage payment, then you're better off waiting a year or so, saving extra money to put down on a home, and buying a place then.

Another option? See if you're eligible for a home loan that accommodates a lower down payment but also doesn't charge PMI. A USDA loan, for example, could help you buy a home in a designated rural area even if you're short on down payment funds, and you won't be hit with PMI. Similarly, if you're an active military member or U.S. veteran, you can apply for a VA loan and avoid PMI (though there are funding fees associated with these loans that may get added onto your mortgage costs). FHA loans have similar fees that can make your mortgage more expensive.

Make sure you're ready for homeownership

If you're planning to put down less than 20% on your home, and the reason boils down to having under $1,000 in savings, then you really shouldn't be buying property in the near future. Often, not having a sizable down payment is a sign that you're not yet ready to own. And if that's the case, you're better off delaying that milestone than getting in over your head.

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