20 Percent Down Gets You A Higher Interest Rate

home sold sign house

For most homebuyers, a 20% downpayment (especially now) is a requirement when purchasing a property.  There is the belief that having 20% of the purchase price to put down along with having excellent credit (720 or above) means getting the best interest rate available and saving money by not paying private mortgage insurance (PMI).  Not so fast…

Since 2008, Fannie Mae and Freddie Mac are giving buyers with 20-25% downpayments the evil eye.  They consider these folks to be the riskiest for two reasons:

- Putting at least 20% down means the borrowers will not have to pay PMI, meaning the lenders will not be protected in case of default.

- Borrowers who put down at least 20% probably have little or no financial backup after scrounging up all they have for the downpayment, meaning they are at risk for default.

For these reasons, borrowers with a 20-25% downpayment are offered higher interest rates versus folks with more than 25% down and folks with less than 20% down.

Fannie Mae and Freddic Mac now view borrowers who put down less than 20% as less risky because they are required to pay PMI (thus protecting the lender) and because the less cash borrowers put down, the more cash they will have on hand for other emergencies.  Why, how nice of them to look out for us…

My absolutely non-expert opinion is this is a big truckload of cow crap.  I must applaud and almost admire Fannie Mae and Freddie Mac for their inventiveness in charging borrowers more at every turn.  After all, they have to replace the shirt they each lost in the last few years.

Folks who are buying now are probably only approved by the banks if they have at least 20% down.  They will now pay more through higher interest rates.  Folks who are buying with less than the standard 20% down are paying more, not through interest rates, but through PMI.  It’s a win-win…for Fannie Mae and Freddic Mac.

Read the rest of the nauseating article at The New York Times.