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Why should I put down 20% when I can put down 5% and save more a month?

This is a question that I hear so often. My reply is: Why pay PMI?

When you go to buy a house, the banks have determined that a safe buyer is someone that can put down 20%. Therefore, if you put down less than 20%, you will be charged a monthly fee often referred to as PMI, or Private Mortgage Insurance. This insurance isn’t for you, it is for the bank. They are insuring themselves against the possibility that you will default on the payments and the bank will be required to seize the house.

If that doesn’t put things into perspective for you, let’s talk about the past 3 years.

The housing market has hit a rough spot because people bought more house than they could afford. They used the easy lending requirements to qualify for more money. They put down less, bought nice furniture, and took lavish vacations. Then, they lost their job or had a fews rough months — and boom — they couldn’t make the mortgage payments anymore and the bank took the house.

For many people out there, they didn’t even know they couldn’t afford the house. The reason for this was their monthly payments started off so low and houses were so easy to sell, that people never thought about what they would do in year 5 when they couldn’t sell the home.

If you are thinking of buying a house, you should make sure that you are prepared financially — because no one wants to wake up in the middle of the night with sleep terrors worrying that they can’t afford it.

Part of being financially prepared is having 20% down, money for closing costs and an emergency fund. Failure to do so puts yourself and your family in jeopardy. There is no house in the world that is worth losing sleep over.

Anna Domzalski is a staff writer for the Financial Bin. Anna will soon begin her role as Dean of Financial Bin University and will conduct online budgeting classes beginning in February 2012. She can be reached via email at [email protected].
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