Central banks have raised interest rates significantly over the past two
years to combat post-pandemic inflation. Many thought this would lead to a
slowdown in economic activity. Yet, global growth has held broadly steady,
with deceleration only materializing in some countries.
Why are some feeling the pinch from higher rates and not others? The answer
partly lies in differences in mortgage and housing market characteristics.
The effects of rising monetary policy rates on activity partly depend on
housing and mortgage market characteristics, which vary significantly across
countries, as we show in a chapter of our latest World Economic Outlook.
Housing is an important channel of monetary policy transmission. Mortgages
are the largest liability for households, with housing often serving as
their only significant form of wealth. Real estate also accounts for a large
share of consumption, investment, employment, and consumer prices in most
economies.
To assess how key housing characteristics impact the effects of monetary
policy on activity, our research leverages new data on housing and mortgage
markets compiled across countries: we find that those characteristics vary
significantly across countries. For example, the share of fixed-rate
mortgages in all country-level mortgages can vary from close to zero in
South Africa to more than 95 percent in Mexico or the United States.
Our results indicate that monetary policy has greater effects on activity in
countries where the share of fixed-rate mortgages is low. This is due to
homeowners seeing their monthly payments rise with monetary policy rates if
their mortgage rates adjust. By contrast, households with fixed-rate
mortgages will not see any immediate difference in their monthly payments
when policy rates change.
The effects of monetary policy are also stronger in countries where
mortgages are larger compared to home values, and in countries where
household debt is high as a share of GDP. In such settings, more households
will be exposed to changes in mortgage rates, and the effects will be
stronger if their debt is higher relative to their assets.
Housing market characteristics also matter: the transmission of monetary
policy is stronger where housing supply is more restricted. For example,
lower rates will decrease borrowing costs for first-time home buyers and
increase demand. Where supply is restricted, this will lead to home price
appreciation. Existing owners will see their wealth increase as a result,
leading them to consume more, including if they can use their home as
collateral to borrow more.
The same holds true where home prices have recently been overvalued. Sharp
price increases are often driven by overly optimistic views about future
house prices. These are typically accompanied by excessive leverage,
prompting spirals of falling home prices and foreclosures when monetary
policy tightens, which can lead to starker income and consumption declines.
Weaker housing transmission
Mortgage and real estate markets have undergone several shifts since the
global financial crisis and the pandemic. At the beginning of the recent
hiking cycle and after a long period of low interest rates, mortgage
interest payments were historically low, the average maturity was long, and
the average share of fixed-rate mortgages was high in many countries. In
addition, the pandemic led to population shifts away from city centers and
to relatively less-supply-constrained areas.
As a result, the housing channels of monetary policy may have weakened, or
at least been delayed, in several countries.
Country experiences vary widely. Changes in mortgage market characteristics
in countries such as Canada and Japan suggest a strengthening of the
transmission of monetary policy through housing. This is driven mainly by a
declining share of fixed-rate mortgages, an increase in debt, and more
constrained housing supply. By contrast, transmission seems to have weakened
in countries such as Hungary, Ireland, Portugal, and the United States,
where characteristics have moved in the opposite direction.
Calibrating policy
Our findings suggest that a deep, country-specific understanding of housing
channels is important to help calibrate and adjust monetary policy. In
countries where the housing channels are strong, monitoring housing market
developments and changes in household debt service can help identify early
signs of overtightening. Where monetary policy transmission is weak, more
forceful early action can be taken when signs of overheating and
inflationary pressures first emerge.
What about now? Most central banks have made significant progress toward
their inflation target. It could follow from the discussion that, if
transmission is weak, erring on the side of too much tightening is always
less costly. However, overtightening, or leaving rates higher for longer,
could nevertheless be a greater risk now.
While fixed-rate mortgages have indeed become more common in many countries,
fixation periods are often short. Over time, and as rates on these mortgages
reset, monetary policy transmission could suddenly become more effective and
so depress consumption, especially where households are heavily indebted.
The longer time rates are kept high, the greater the likelihood that
households will feel the pinch, even where they have so far been relatively
sheltered.
—This blog is based on Chapter 2 of the April 2024 World Economic
Outlook, “Feeling the pinch? Tracing the effects of monetary policy
through housing markets.” The authors of the chapter are Mehdi Benatiya
Andaloussi, Nina Biljanovska, Alessia De Stefani, and Rui Mano with
support from Ariadne Checo de los Santos, Eduardo Espuny Diaz, Pedro
Gagliardi, Gianluca Yong, and Jiaqi Zhao. Amir Kermani was an external
consultant and Jesper Lindé consulted on the modeling.
Housing demand reached a new level of enthusiasm during the pandemic, with homebuyers benefitting from extremely low mortgage rates. From the summer of 2020 until much of 2021, average 30-year mortgage rates stayed under 3%. However, as more and more buyers jumped into the real estate market, months of inventory began to plummet and home prices surged. According to the U.S. Census Bureau and U.S. Department of Housing and Urban Development, the national average sales price in the US grew from $383,000 in Q1 2020 to a peak of $552,600 in Q4 2022 – a 44.3% increase in less than two years.
So if you purchased a home during the pandemic, how much is it worth now? To find out, Zoocasa analyzed median home prices in 30 major US cities from January 2020, 2021, and 2022, and compared them with the 2024 median price to see how much they’ve changed over the last 4, 3, and 2 years.
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Median single-family home prices were sourced from each city’s respective real estate board and are from January of each year. Average 30-year fixed rates were sourced from Freddie Mac and are from the first week of each month. The national average sales price in the US for each quarter was sourced from the U.S. Census Bureau and U.S. Department of Housing and Urban Development, Average Sales Price of Houses Sold for the United States [ASPUS], retrieved from the Federal Reserve Bank of St. Louis.
In 14 of the 30 real estate markets we analyzed, the median home price increased by more than $100,000 from 2020 to 2024. In those four years, Californian homes increased the most in value. San Diego and San Francisco homes bought in 2020 appreciated by $265,000 and $247,000 respectively. Los Angeles homebuyers also built a significant amount of equity, with the median home price rising by $211,500 to $750,000 in 2024.
Outside of California, 2020 home purchases in Boston and Miami experienced significant price growth, both increasing by more than $200,000 in four years. For homebuyers in Miami in 2021, the value of their homes experienced the second-highest increase over three years, at $170,000, just below San Diego’s increase of $195,000. But Miami isn’t the only city in Florida where home prices have grown substantially from 2020. In Tampa and Jacksonville, home values have increased by $151,500 and $129,900 since 2020, and since 2021 they have risen by $115,000 and $95,919 respectively.
Other cities where home values increased by more than $100,000 in four years include Denver, Nashville, Dallas, and Salt Lake City. Buyers who bought a home in one of these cities in 2021 also benefited from sizable price appreciation – with home values rising by $100,000 or more in three years.
Though 2020 and 2021 pandemic buyers experienced a significant increase in their home values, some homebuyers who purchased a home in 2022 – when interest rates started climbing – have yet to see equity build. From January 2022 to January 2024, home values dropped in San Francisco by $71,000 and in Brooklyn, they dropped by $51,000. 2022 homebuyers are currently down in six other cities: Washington DC, San Antonio, Memphis, New Orleans, St. Louis, and Salt Lake City. But this doesn’t mean homebuyers in those cities won’t build equity. According to the National Association of Realtors®, in 2023 the median time buyers expected to stay in their home was 15 years. This gives the average homeowner plenty of time for their home to appreciate, and with interest rates coming down, competition will rise and push home prices up once again.
The vast majority of pandemic buyers are in the green, even if they bought their home in 2022. With some of the highest median home prices in the country, it comes as no surprise that Boston, Miami, San Diego and Los Angeles lead the way for 2-year price increases – all up by $50,000 or more. Not every city experienced home price increases of those heights, however. 2022 homebuyers in Philadelphia and Tucson built home equity, but values increased by just $1,250 and $2,500 respectively in two years.
If you’re looking to find an affordable home this spring, give us a call! We can answer any questions you have about your local market and help you navigate the home-buying process.
Zillow’s latest momentum is a manifestation of its strategy to diversify revenue across the transaction as it transitions from a lead gen platform to a housing “super app.”
Why it matters: As Zillow scales new revenue streams, including Zillow Home Loans, Rentals, ShowingTime+, and Seller Solutions, it is planting important seeds for its next phase of growth.
Context: After a pandemic bump, Zillow’s overall revenue declined and has remained flat since 2021 – during one of the worst real estate markets ever recorded.
Over a challenging two years, Zillow’s residential and mortgage businesses have shrunk (on par with the declining market), while its rentals business has ticked up from strong organic growth.
Even with flat revenue, Zillow has significantly outperformed the market during this period, with the magnitude dependent on whether you consider Zillow a lead generation platform or a housing “super app.”
While revenue growth at Zillow, the lead generation platform, has slightly outperformed the market, revenue growth at Zillow, the housing super app, is outperforming at a much higher rate.
This is a result of new products and services that are generating additional revenue across more of the transaction.
Dig deeper: For years I’ve used the following framework to think about real estate portal growth strategy.
Zillow’s evolving strategy sees it getting closer to the real estate transaction (Zillow Flex and Zillow Home Loans) and expanding to more parts of the transaction (Mortgages, Rentals, Seller Services, Agent Tools).
Typically, services closer to the transaction are higher revenue, while services further from the transaction are higher margin and more scalable.
Zillow asserts that its strategy to grow transaction and revenue share is working.
Zillow’s mortgage business is growing, but, counter-intuitively, revenue is dropping as purchase volume nearly doubles.
This is a result of a shifting product mix – Zillow is funneling leads from its mortgage marketplace to fulfillment by Zillow Home Loans.
It’s shifting from an asset-light marketplace to an asset-heavier mortgage brokerage operation, with much higher revenue potential.
Last year I claimed that Listing Showcase was Zillow’s most interesting product, and now it’s probably Zillow’s most interesting slide in its investor presentation.
The mid-term revenue potential is spot on based on my earlier calculations, representing a significant revenue opportunity as a new, sell side product.
But the most interesting opportunity is long-term, where Listing Showcase could be rolled out as a mass market product for all agents.
What to watch: Zillow’s future growth aspirations hinge on a few key factors.
Expansion into 40 markets – as early “enhanced markets,” Atlanta and Phoenix are useful data points, but not necessarily representative of all 40 markets.
The last mile problem – Zillow remains completely dependent on local real estate agent teams to drive adoption of its new products.
Zillow Home Loans is driving revenue, but it’s unprofitable, lower-quality revenue – the business needs to demonstrate an ability to grow revenue faster than expenses.
The bottom line: Zillow is diversifying its revenue along the transaction – what it calls its super app – and is outperforming a depressed market.
Zillow will almost certainly miss its $5 billion in revenue by 2025 goal, but like many plans that were laid in early 2022, things have changed.
While early signs are promising in a few key markets, the path forward hinges on the stubborn realities of conversion rates, profitability, and – as always – partnering with agents.
Commercial/Multifamily Mortgage Delinquency Rates MBA Research Mortgage Credit Availability Index Press Release Residential
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WASHINGTON, D.C. (January 16, 2024) — Delinquency rates for mortgages backed by commercial properties increased during the fourth quarter of 2023, according to the Mortgage Bankers Association’s (MBA) latest commercial real estate finance (CREF) Loan Performance Survey.
“Ongoing challenges in commercial real estate markets pushed the delinquency rate on CRE-backed loans higher in the final three months of 2023,” said Jamie Woodwell, MBA’s Head of Commercial Real Estate Research. “Delinquency rates jumped to 6.5 percent of balances for loans backed by office properties and to 6.1 percent for lodging-backed loans. Delinquencies for loans backed by retail properties remain elevated from the onset of the pandemic but were unchanged during the quarter. Delinquency rates for multifamily and industrial property loans both increased marginally but remain much lower.”
Woodwell continued, “Long-term interest rates have come down from their highs of last year, which should provide some relief to some loans, but many properties and loans still face higher rates, uncertainty about property values and – for some properties – changes in fundamentals. Each loan and property faces a different set of circumstances, which will come into play as the market works through loans that mature this year.”
The balance of commercial mortgages that are not current increased in December 2023 (compared to September 2023).
96.8% of outstanding loan balances were current or less than 30 days late at the end of the third quarter, down from 97.3% at the end of the third quarter of 2023.
2.3% were 90+ days delinquent or in REO, up from 2.2% the previous quarter.
0.3% were 60-90 days delinquent, up from 0.2% the previous quarter.
0.6% were 30-60 days delinquent, up from 0.3%.
Loans backed by office properties drove the increase.
6.5% of the balance of office property loan balances were 30 days or more days delinquent, up from 5.1% at the end of last quarter.
6.1% of the balance of lodging loans were delinquent, up from 4.9%.
5.0% of retail balances were delinquent, flat from the previous quarter.
1.2% of multifamily balances were delinquent, up from 0.9%.
0.9% of the balance of industrial property loans were delinquent, up from 0.6%.
Among capital sources, CMBS loan delinquency rates saw the highest levels.
5.1% of CMBS loan balances were 30 days or more delinquent, up from 4.4% last quarter.
Non-current rates for other capital sources remained more moderate.
0.9% of FHA multifamily and health care loan balances were 30 days or more delinquent, up from 0.8%.
0.9% of life company loan balances were delinquent, up from 0.7%.
0.5% of GSE loan balances were delinquent, up from 0.4%.
MBA’s CREF Loan Performance survey collected information on commercial and multifamily mortgage portfolios as of December 28, 2023. This month’s results build on similar surveys conducted since April 2020. Participants reported on $2.7 trillion of loans in December 2023, representing 58 percent of the total $4.6 trillion in commercial and multifamily mortgage debt outstanding (MDO).
Buying a home is an exciting milestone, but it comes with its fair share of financial responsibilities, including the often-misunderstood closing costs. These costs are a vital part of your home purchase budget and can significantly impact your financial planning as a new homeowner.
Far from being just a trivial detail, closing costs encompass a range of fees and charges that, when understood correctly, can help you make more informed decisions and potentially save money in your home-buying journey.
Here’s everything you need to know about mortgage closing costs to avoid any last-minute surprises.
Who Pays the Closing Costs: Buyer or Seller?
When it comes to closing costs in a home purchase, the question of who pays what is often a topic of negotiation and varies by transaction. Generally, both buyers and sellers have their own set of fees to handle, but the exact distribution can differ.
Your mortgage lender is required to provide you with an estimated breakdown at multiple points in the loan process. The loan estimate outlines the estimated closing costs and lists out all the different fees, as well as who is responsible for paying them.
Buyer’s Responsibility
Typically, the buyer shoulders a significant portion of the closing costs, which can include:
Loan-related fees (such as application and origination fees)
Appraisal and inspection fees
Initial escrow deposit for property taxes and mortgage insurance
Title insurance and search fees
Seller’s Contribution
Sellers commonly pay for:
Real estate agent commissions
Transfer taxes and recording fees
Any homeowner association transfer fees
Room for Negotiation
It’s important to note that these are not hard and fast rules. In many cases, closing costs are a point of negotiation in the sale agreement. For example, in a buyer’s market, a seller might agree to cover a larger portion of the closing costs to attract buyers. Conversely, in a seller’s market, the buyer might take on a larger share to make their offer more appealing.
Case Example
Imagine you’re buying a home priced at $300,000. The closing costs, amounting to approximately 3% of the purchase price, would be around $9,000. As a buyer, you might agree to pay $6,000 of this, covering most of the loan-related fees and escrow deposits. The seller, in turn, might handle the remaining $3,000, covering their portion of fees like the agent’s commission and transfer taxes.
Comprehensive List of Fees Associated with Mortgage Closing Costs
Mortgage closing costs can be broken down into a few different categories: lender fees, real estate fees, and mortgage insurance fees.
Lender Fees
These fees may vary depending on the lender you choose. Here’s a basic rundown of each closing cost to give you an idea of what you can expect.
Application fee: Covers processing your mortgage loan application and obtaining your credit report.
Attorney fee: In some states, an attorney must review the mortgage paperwork; fees vary and can be hourly or a flat rate.
Broker fee: If using a mortgage broker, they typically charge a commission, usually between 1% and 2% of the home’s purchase price.
Origination fee: The origination fee compensates the lender for administrative tasks and is typically around 1% of the loan amount.
Discount points: Paying points upfront can lower your interest rate; each point equals one percent of your loan amount.
Prepaid interest: Covers the interest that accrues between the closing date and the first mortgage payment.
Recording fee: Charged by local governments for recording the mortgage documents; it covers the administrative costs of maintaining public records.
Underwriting fee: Charged for the underwriter’s services in evaluating and preparing your loan; includes costs like due diligence and legal fees.
Real Estate Fees
Real estate fees are related to costs surrounding the property itself. Some are one-time fees, while others are recurring.
Appraisal fee: Necessary to assess the market value of the home. Costs vary, but typically around $500 to $600, payable before the appraisal or at closing.
Property tax: Generally an annual or biannual payment. Most lenders require at least two months’ worth pre-paid into an escrow account at closing.
Homeowners’ insurance policy: An annual premium required for a home loan. The first year’s premium is often paid at closing, with subsequent payments included in your mortgage.
Title search and insurance: Ensures the property is lien-free. Lender’s title insurance protects the lender, while owner’s title insurance safeguards the buyer.
Transfer tax: Imposed by governments when a property is sold, usually a percentage of the sale price.
HOA fees: For properties in a homeowners association, this may include a transfer fee and potentially the first year’s annual assessment.
Mortgage Insurance Fees
When you pay less than 20% of your home purchase price as part of your down payment, you’re usually required to pay mortgage insurance. Your private mortgage insurance (PMI) premium is typically assessed as a monthly fee within your mortgage payment. However, you may also have some costs at closing.
Upfront mortgage insurance fee: Depending on your loan type and lender, you may have to pay an additional application fee for a loan with mortgage insurance. Additionally, some loans require that you pay a one-time fee at the time of closing on top of your annual fee throughout the mortgage.
Government-backed loan fees: If your loan is from the FHA, USDA, or VA, then you may have extra mortgage insurance fees if your down payment is under 20%. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. The VA and USDA don’t charge mortgage insurance, but instead have guarantee fees. VA fees fall between 1.25% and 3.3% while USDA fees are a flat 2%.
Understanding How Closing Costs Are Calculated
That list may seem huge and overwhelming. However, before making an offer on a house, you can estimate your closing costs using some shortcuts. Average closing costs are usually about 2% – 6% of the loan amount.
Let’s look at that in real numbers.
Say you buy a home for $200,000. You can realistically expect your closing costs (not including your down payment) to extend anywhere between $4,000 and $10,000. That’s a pretty big range, so use that as a starting point when you begin to compare loan offers.
But don’t wait until you’ve fallen in love with a house to financially plan for closing costs.
Instead, use an online closing costs calculator early in the process to get a more specific estimate. You will want to use real information like average property taxes in your area and the costs associated with your type of loan.
A good mortgage lender can walk you through the variables, including how different loan types affect your closing costs.
Strategies for Reducing Closing Costs: Negotiation Tactics
Negotiating closing costs can be an effective way to reduce the financial burden of buying a home. While some fees are fixed, others offer room for negotiation. Here are strategies and insights to help you lower these costs:
Understand What Can Be Negotiated
Identify which fees are negotiable. These often include certain lender fees like the origination fee, broker fees, and some third-party charges. Knowing what can be adjusted is the first step in negotiation.
Compare and Shop Around
Before settling with one lender, shop around. Get Good Faith Estimates from multiple lenders and compare their closing costs. This can give you leverage in negotiations, as lenders are often willing to offer competitive pricing to win your business.
Ask the Seller to Contribute
In some real estate markets, it’s common for buyers to ask sellers to cover a portion of the closing costs. This is particularly feasible in buyer’s markets, where sellers are motivated to make the sale.
Look for Lender Credits
Some lenders offer credits in exchange for a slightly higher interest rate on your loan. These credits can be used to offset closing costs. While this increases your long-term interest cost, it can significantly reduce upfront expenses.
Negotiate with Service Providers
For services like home inspections and title searches, you have the option to choose your provider. Shop around and negotiate with these providers for better rates.
Review the Closing Disclosure Form
Before closing, you’ll receive a Closing Disclosure form listing all the fees. Review it carefully and question any fees that seem off or weren’t previously disclosed. Sometimes, errors can be corrected, leading to lower costs.
Time Your Closing
By scheduling your closing towards the end of the month, you can reduce the amount of prepaid interest you’ll need to pay.
Seek Legal or Financial Advice
Consider consulting with a real estate attorney or a financial advisor. They can provide valuable advice on which costs can be cut and how to negotiate effectively.
Options for Financing Your Closing Costs
In some cases, you can roll your closing costs into the mortgage, but you have to meet some basic requirements. First, it depends on your type of loan, since not all loans allow you to do this. Most government-backed loans, like FHA and USDA loans, do offer the possibility to add them into your home loan.
What’s the downside to this idea?
A higher loan amount means a higher monthly mortgage payment and a larger amount of interest paid over the life of your mortgage. Furthermore, your new home needs to appraise for the higher amount you want to finance. Plus, your debt-to-income ratio needs to be able to support that larger payment to qualify for such a loan.
If you’re getting a loan that doesn’t allow for closing costs to be rolled into the mortgage, you can still get around it. However, you must meet those criteria we just talked about.
Simply ask the seller (through your real estate agent) to pay for closing costs in exchange for paying the extra amount as part of the purchase price. Here’s an example.
If your $200,000 offer is accepted, but closing costs are $5,000, ask the seller to contribute $5,000 and change your offer to $205,000. At the end of the day, the seller still walks away with the same amount of money.
Again, this strategy is contingent upon the numbers working for you, your financial situation, and your mortgage application.
Finalizing Payment: Methods to Cover Your Closing Costs
When you finally get to closing day, it’s almost time to relax and move into your new home. But first, don’t forget to set up a way to pay closing costs.
You can ask your lender or settlement company for the preferred payment method. However, in most cases, you can either get a cashier’s check from your bank or set up a wire transfer. There’s usually a minor fee associated with each one. It’s a quick and easy process, but it shouldn’t be forgotten before you get to closing.
Conclusion
Closing costs are a crucial aspect of buying a home. Being well-informed and prepared for these expenses can make a significant difference in your financial planning. Remember, while some fees are fixed, others offer room for negotiation, and shopping around can lead to potential savings.
By factoring in these costs from the start, you can ensure a smoother, more predictable home-buying experience. Buying a house is a major step – financially and personally. Approach it with the right knowledge, and you’ll be set to make this important decision with confidence and peace of mind.
Frequently Asked Questions
What is an escrow account, and how does it relate to closing costs?
An escrow account is a third-party account where funds are held during the process of a transaction, like buying a home. Regarding closing costs, part of these costs often includes initial deposits into an escrow account for future property taxes and homeowners’ insurance. This ensures that there is enough money set aside to cover these recurring expenses.
Can closing costs be included in the mortgage loan?
In some cases, closing costs can be rolled into the mortgage loan. This is more common with certain types of loans, like FHA loans. However, including closing costs in the loan increases the total loan amount and, consequently, your monthly mortgage payments and the total interest paid over the life of the loan.
Are there any tax benefits related to closing costs?
Yes, certain closing costs can have tax benefits. For example, points paid to lower your interest rate may be deductible in the year you buy your home. Always consult a tax professional to understand how your closing costs might affect your taxes.
How can first-time homebuyers prepare for closing costs?
First-time homebuyers should start saving early for closing costs, which typically range from 2% to 6% of the home purchase price. It’s also helpful to research and understand the different types of fees involved in closing costs, and consider attending homebuyer education courses for more detailed information.
What happens if I can’t afford closing costs?
If you find that you can’t afford closing costs, there are a few options. You can negotiate with the seller to pay some or all of the costs, look for lender credits, or explore programs available for first-time buyers or low-income buyers that offer assistance with closing costs.
If you’re on the cusp of buying a home, one of the first and most significant considerations you’ll encounter is the down payment. This initial investment can influence not just your ability to purchase a home, but also the terms of your mortgage and your financial flexibility in the years to come. Understanding the ins and outs of down payments is more than a financial formality; it’s a critical step in making one of life’s biggest decisions.
In this guide, we explore the essential aspects of making a down payment on a house. From traditional norms to modern options, you’ll learn about the factors influencing down payment requirements and their implications. This article is designed to assist both first-time buyers and experienced investors in understanding the impact of various down payment sizes on the home buying process and their financial future.
The journey to homeownership is filled with important decisions. Our aim is to provide you with the insights needed to make informed choices, aligning your dream of owning a home with your financial objectives. Let’s delve into the importance of down payments and how they play a pivotal role in your home buying adventure.
What is a down payment on a house?
A mortgage is a loan used to purchase a house. But there are very few mortgages available that will cover the total cost of the home.
Instead, most mortgage lenders require that you pay a percentage of the home’s purchase price and finance the rest with a loan. The amount you pay upfront is called a down payment.
This provides the lender with the assurance that you are vested in the property. Otherwise, you may be more likely to default on the mortgage because you didn’t spend any of your own money on the house. Most people won’t miss their monthly mortgage payment and end up in foreclosure. However, lenders typically require it across the board.
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20% Down Payment
Traditionally, banks required individuals to have a 20% down payment on a house to qualify for a loan. But it wound up making homeownership extremely exclusionary.
After all, that amounts to $40,000 on a $200,000, and most people don’t have that kind of money lying around. So while 20% remains the standard down payment preferred by most lenders, it’s no longer the norm.
In fact, data shows that the average down payment amount is shrinking due to young first-time home buyers. But there are some benefits to saving up a larger down payment of 20% before buying a home, and they can add up to some pretty significant savings over time.
Even beyond financial reasons, putting in an offer letter with a 20% down payment with a conventional loan can make you a more attractive buyer when you’re competing for a specific house.
Why? Because it will give you a lower loan-to-value ratio (LTV.) Your loan looks less likely to fall through because you have a more substantial cash flow and assets than someone with a low down payment. All other things equal, a seller will probably select your offer in a competitive market.
Avoid Paying Private Mortgage Insurance
Another major perk of a large down payment? You avoid paying private mortgage insurance (PMI). Any mortgage for a home you own with less than 20% equity is subject to additional insurance to protect the bank.
The amount depends on your loan type, but it’s usually an annual amount divided out as part of your monthly payments. To get rid of the mortgage insurance, you typically have to refinance the loan, which can be costly.
You also get a better interest rate with a higher down payment. On top of that, having a smaller loan amount lowers your monthly mortgage payment, giving you more money left in your pocket each month.
Low Down Payment Mortgage Options
Most lenders these days don’t expect you to have a full 20% down payment saved up. How much down payment you’ll need for a house depends on the type of loan you choose. The exact amount you’ll need varies based on several factors.
Here’s a rundown of the most common types of mortgages and the down payment requirements for each one. Start here to begin your selection process. It’s also wise to ask potential lenders to provide different scenarios for each loan type you qualify for.
Conventional Loans
Even if you don’t have a 20% down payment, you can qualify for a conventional loan. The minimum down payment is 3%, although you can also do any amount higher than that.
On a $200,000 home, you would pay $6,000 with the minimum down payment. Until a few years ago, at least a 5% down payment was required.
However, Fannie Mae studies indicated that saving up that much money was creating an obstacle to homeownership for many creditworthy individuals. So they created a 97% loan-to-value option that lenders can offer to mortgage applicants.
2% may not seem like a huge difference, but it adds up quickly when dealing with such large dollar amounts. In the scenario above, a 5% down payment on the same house would require a $10,000 down payment — $4,000 more than the 3% option.
Conventional Mortgage Lender Requirements
To qualify for a conventional mortgage, you’ll need to meet certain lender requirements, which can be strict compared to other loan types. For example, credit score requirements generally start around 620, although some lenders may accept as low as 580.
You’ll receive a higher interest rate with both a lower credit score and a small down payment, another factor in determining how much to save for your home. Of course, as with any down payment under 20%, you will have to pay mortgage insurance.
The exact rate can vary, but here’s an example of how much it could cost you. If your loan amount is $194,000 (after your 3% down payment) and your annual mortgage insurance rate is 0.5%, you’d have to pay $970 each year. Split up over 12 monthly mortgage payments, your PMI would add just over $80 to your bill.
FHA Loans
An FHA loan is another option for a loan with a low down payment. FHA loans are backed by the Federal Housing Administration, and insured by the federal government. They allow you to qualify for a mortgage without as many restrictions as conventional loans.
With an FHA loan, you only need a 3.5% down payment. So on that same $200,000 house, you’d only need to supply $7,000 in upfront cash.
FHA Loan Lender Requirements
You also get to take advantage of lower credit score requirements, with the minimum at only 580. Plus, you can qualify with a higher debt-to-income ratio. Conventional lenders only allow 43% of your monthly income to go towards debt payments, including your mortgage.
On the other hand, an FHA lender might let that number creep up between 45% and 50%. So, this is another example of a couple of percentage points making a difference in how much home you can afford.
Mortgage Rates and Private Mortgage Insurance
Again, lower mortgage application standards, including a smaller down payment, typically result in higher costs elsewhere. As a result, you’re likely to see higher interest rates and a higher PMI. With an FHA loan, you’ll have to pay that PMI in two different ways.
The first is a one-time payment at closing. This amounts to 1.75% of your loan amount. Again, say that you’re taking out a $190,000 loan; part of your closing costs would include a $3,325 PMI payment. On top of that, you’ll pay about 0.85% annually.
In this example, that amounts to $1,615, adding $134 to your monthly mortgage payment. So making a low down payment can cost you when it comes to paying PMI each month! Still, it may be a better option, especially if you can quickly reach a 20% loan-to-value and refinance the home loan in a few years.
VA Loans
If you’re a military veteran or active military member, you can qualify for a loan backed by the VA. The great thing about this type of loan is that it doesn’t require any down payment at all.
It also has lower credit score requirements, and no mortgage insurance is required. You do, however, have to pay a one-time funding fee. It can either be paid at closing or rolled into your mortgage amount.
The fee amount varies depending on a few different factors, including your down payment amount, your type of service, and whether you’ve used a VA loan in the past. But if you are regular military personnel and a first-time user of the VA loan with a zero dollar down payment, your funding fee will total 2.15% of the loan amount.
For the sake of comparison, let’s look at the $190,000 loan again. In this scenario, your funding fee comes to $4,085. Since it’s just a one-time fee, the impact on your monthly payment would be fairly minimal since it’s spread out over 30 years.
USDA Loans
A USDA loan is backed by the U.S. Department of Agriculture and promotes homeownership in rural areas. But you don’t have to buy a farm to qualify for this loan type. In fact, many peripheral suburban areas are included.
The great thing is that there is no down payment required for a USDA loan. However, you must meet certain income requirements and may only earn a certain amount each year, which varies depending on where you live.
Like VA loans, USDA loans don’t require PMI, but you have to pay an upfront premium if your down payment is less than 20%. The premium amount is 2% of your loan amount. That would be $3,800 on a $190,000 loan.
Again, you can either pay it up front as part of your closing costs or roll it into your mortgage amount. Check out the eligibility map to see if any properties near you qualify for a USDA loan.
HomeReady Loans
Our final low down payment loan is the HomeReady loan. This loan helps potential homeowners in low-income areas to get the financing they need for a mortgage.
The required down payment on a house is just 3%, and your debt-to-income ratio can be as high as 50%. There’s no income limit, but the property does have to be located in a low-income census tract.
You also have to complete an online education program about homeownership. You will need to pay mortgage insurance with the minimum down payment. However, the program claims to offer lower premiums compared to other loans.
If you find a home you love in an approved area, it’s definitely worth comparing to other available options.
See also: How to Buy a House With No Down Payment
What other costs are associated with buying a home?
We’ve talked a lot about private mortgage insurance adding to the total cost of your loan. But it’s also important to remember that there are fees and expenses to consider.
Some you’ll have to pay upfront, while others are paid over the course of the loan. But, first, remember that your monthly payment includes not only principal and interest but also taxes and insurance.
PITI
Cumulatively, this is called PITI (principal, interest, taxes, and insurance), and those add-ons are often overlooked when using a mortgage calculator. City or county taxes are owed every year, but most lenders charge you monthly and then make the payment on your behalf.
Homeowners Insurance
Homeowners insurance is also required for a loan and can easily tack on an extra $300 to $1,000 per year, depending on the value of your home.
Closing Costs
You should also consider closing costs. Many buyers may try to negotiate that the seller covers these costs, but this tactic isn’t always successful, particularly in competitive real estate markets.
Closing costs cover various services and fees and usually amount to 3-5% of the home’s purchase price. So on that $200,000 home, you could end up paying between $6,000 and $10,000 in closing costs.
If you don’t have the cash up front, you can typically roll them into the loan, but you’ll end up with higher monthly payments. Don’t be afraid of closing costs or any other fees associated with a mortgage, especially if you don’t have much saved for a down payment.
Bottom Line
Understanding down payments is crucial in your home-buying journey. The ideal down payment for your new home hinges on your financial circumstances and the types of loans you’re considering. While a larger down payment can reduce long-term costs through lower interest rates and mortgage insurance, balancing this with your available savings and overall budget is key.
Remember to account for additional expenses like closing fees, taxes, and insurance. These play a significant role in the overall cost of purchasing a home. Utilizing tools like mortgage calculators can help you grasp the implications of different down payment amounts.
In the end, whether you choose a minimal down payment or aim for 20%, the most vital aspect is making an informed decision that suits your financial situation and long-term housing plans. Stay informed, seek guidance when needed, and confidently take this important step towards homeownership.
Frequently Asked Questions
What is the ideal credit score to qualify for a mortgage with a low down payment?
While the minimum credit score required for a mortgage can vary depending on the lender and the type of loan, generally, a score of 580 or higher is needed to qualify for more favorable low down payment options like FHA loans. Higher scores can secure better interest rates and terms.
How can I improve my credit score before applying for a mortgage?
Improving your credit score involves several steps: pay your bills on time, reduce your debt-to-income ratio, avoid opening new credit accounts before applying for a mortgage, and check your credit report for errors. Consistently managing these areas can gradually improve your score.
Are there any down payment assistance programs available?
Yes, there are various down payment assistance programs available, often based on location, income level, or first-time homebuyer status. These programs can offer grants, low-interest loans, and other forms of assistance. It’s advisable to research local and state programs for eligibility.
Can gift funds be used for a down payment?
Yes, many loan types allow the use of gift funds for down payments. However, there are specific rules regarding the source of these funds and documentation required. It’s important to discuss this with your lender to ensure compliance with their guidelines.
What is the difference between pre-qualification and pre-approval for a mortgage?
Pre-qualification is an initial step where a lender gives you an estimate of how much you might be able to borrow based on basic financial information you provide. Pre-approval is more comprehensive, involving a detailed review of your finances and a more concrete offer of loan amount and terms.
How long does the mortgage application process typically take?
The duration of the mortgage application process varies, but generally takes between 30 to 45 days from application to closing. This timeline can be influenced by the complexity of your financial situation, the type of loan, and the efficiency of your lender.
What happens if I make a down payment of less than 20%?
If you make a down payment of less than 20%, you’ll likely need to pay for Private Mortgage Insurance (PMI), which protects the lender in case of default. PMI is typically required until you have at least 20% equity in your home.
Can I withdraw from my retirement account for a down payment without penalty?
In some cases, you can withdraw funds from certain retirement accounts, like an IRA, for a down payment without incurring early withdrawal penalties, especially if you’re a first-time homebuyer. However, there are limits and tax implications to consider.
What are the risks of putting down a smaller down payment?
A smaller down payment on a house can mean larger monthly mortgage payments, higher interest rates, and the necessity to pay PMI. It may also affect your competitiveness as a buyer in a strong market.
How can I estimate my monthly mortgage payment?
Your monthly mortgage payment can be estimated using online mortgage calculators. These calculators take into account the loan amount, down payment, interest rate, and loan term, giving you a rough idea of what to expect.
Many people mistakenly believe they can’t afford to buy a home because they don’t really know what their options are. Fortunately, home loans are not one-size-fits-all. There are various mortgages available to suit your budget and preferences.
So, before you start visiting open houses, take some time to familiarize yourself with the different home loans that are available. Going into the home buying process informed could help you save a lot of money on your down payment, interest, and fees.
The 8 Types of Mortgage Loans Available
Understanding the different types of mortgage loans will help you choose the option that’s best suited for you. Let’s look at a brief overview of the eight types of mortgages available in 2024.
1. Conventional Loans
A conventional loan is a mortgage that’s not issued by the federal government. There are two different types of conventional mortgages you can choose from: conforming and non-conforming loans.
A conforming loan falls within the guidelines laid out by Fannie Mae and Freddie Mac. You’ll take out a conforming loan through a private lender like a bank, credit union, or mortgage company. Since the government doesn’t guarantee the loan, conventional mortgages typically come with more stringent lending requirements.
According to the CFPB, the maximum loan amount for a conventional loan is $484,350. However, it may be as high as $726,525 in counties with a high cost of living. You’ll have to take out private mortgage insurance (PMI) if you don’t have a 20% down payment.
Conventional loans are fixed-rate mortgages, which means your monthly mortgage payment remains the same throughout the entire life of the mortgage loan. The terms typically range from 10 to 30 years:
30-year fixed-rate mortgage
20-year fixed-rate mortgage
15-year fixed-rate mortgage
10-year fixed rate mortgage
Pros:
It can be used to purchase a primary home or an investment property
Tends to cost less than other types of loans
You can cancel your private mortgage insurance (PMI) once you reach 20% equity in your home
Cons:
Must have a minimum FICO score of 620 or higher
Harder to qualify for than government-backed loans
You’ll need to have a low debt-to-income ratio to qualify
2. Conventional 97 Mortgage
A conventional 97 mortgage is similar to a conventional loan in that it’s widely available to various borrowers. The main difference is that with this type of home loan, you only have to pay a 3% down payment.
The program is available for first-time and repeat home buyers. However, it must be your primary place of residence, and the maximum loan amount is $510,400.
Pros:
Widely available to most borrowers
Only requires a 3% down payment
Available for first-time and repeat homebuyers
Cons:
Cannot be used to purchase investment properties
The maximum loan amount is $510,400
Requires a minimum FICO score of 660 or higher
3. FHA Loans
FHA loans are backed by the Federal Housing Administration and are a popular option for first-time home buyers. To qualify, you need to have a 3.5% down payment and a minimum credit score of 580.
If you have a credit score of 500 or higher, you can qualify for an FHA loan with a 10% down payment. These flexible requirements make FHA loans a suitable option for borrowers with bad credit.
To qualify for an FHA home loan, you must have a debt-to-income ratio of 43% or less. These loans can’t be used to purchase investment properties, and your home must meet the FHA’s lending limits.
These limits vary by state, so you’ll need to check the FHA’s website to see what the guidelines are for your area.
Pros:
Loans come with low down payment options
A viable option for borrowers with bad credit
Available for first-time and repeat homeowners
Cons:
Loans can’t be taken out for investment properties
If your credit score is below 580, a 10% down payment is required
You must have a debt-to-income ratio below 43%
Mandatory mortgage insurance premiums
4. FHA 203(k) Rehab Loans
An FHA 203(k) rehab loan is sometimes referred to as a renovation loan. It allows home buyers to finance the purchase of their home and any necessary renovations with a single loan.
Many people purchase older homes to fix them up. Instead of taking out a mortgage and then applying for a home renovation loan, you can accomplish both within a single mortgage.
A rehab loan is similar to an FHA loan in that you’ll need a 3.5% down payment. However, the credit requirements are stricter, and you’ll need a minimum credit score of 640 to qualify.
Pros:
Allows you to buy a home and finance the remodel within one mortgage
Requires a minimum 3.5% down payment
Easier to qualify since the FHA backs your loan
Cons:
Credit requirements are more stringent than typical FHA loans
You must hire approved contractors and cannot DIY the renovations
The closing process takes longer than other types of mortgages
5. VA Loans
The Department of Veteran Affairs guarantees VA loans. These loans are designed to make it easier for veterans and service members to qualify for affordable mortgages.
One of the biggest advantages of taking out a VA loan is that it doesn’t require a down payment or mortgage insurance premium (MIP). And there are no listed credit requirements, though the lender can set their own minimum credit requirements. VA loans typically come with a lower interest rate than FHA and conventional loans.
To qualify for a VA loan, you must either be active duty military, a veteran or honorably discharged. You’ll need to apply for your mortgage through an approved VA lender.
Pros:
No down payment required
No PMI required
Flexible credit requirements
Cons:
Must be a veteran to qualify
Some sellers will not want to deal with a VA loan
6. USDA Loans
A USDA loan is a type of mortgage that’s available for rural and suburban home buyers. It’s a viable option for borrowers with lower credit scores that are having a hard time qualifying for a traditional mortgage.
USDA loans are backed by the U.S. Department of Agriculture, and they help low-income borrowers find housing in rural areas. USDA loans do not require a down payment, but you will need a minimum credit score of 640 to qualify.
You will need to meet the USDA’s eligibility requirements to qualify for the loan. But according to the department’s property eligibility map, over 95% of the U.S. is eligible.
Pros:
No down payment required
A practical option for low-income borrowers
Available to first-time and repeat home buyers
Cons:
A minimum credit score of 640 is required
Housing is limited to rural and suburban areas
7. Jumbo Loans
A jumbo loan is a mortgage that exceeds the financing guidelines laid out by the Federal Housing Finance Agency. These loans are unable to be purchased or guaranteed by Fannie Mae or Freddie Mac.
A jumbo mortgage is financing for luxury homes in competitive real estate markets, and the limits vary by state. In 2024, the FHFA raised the limits for a one-unit property to $766,550, increasing from $726,200 in 2023. In certain high-cost areas, the limits for jumbo loans vary, reaching up to $1,149,825. These jumbo loans are for mortgages that exceed the set limits in their respective counties.
If you’re hoping to buy a home that costs more than $1 million, you’ll need to take out a super jumbo loan. These loans provide up to $3 million to purchase your home. Both jumbo and super jumbo mortgages can be difficult to qualify for and require excellent credit.
Pros:
These loans make it possible to purchase large homes in expensive areas
Typically comes with flexible loan terms
Cons:
Jumbo loans and super jumbo loans come with higher interest rates
You’ll need a good credit history to qualify
8. Adjustable Rate Mortgages (ARMs)
Unlike a fixed-rate mortgage, where the interest rate is set for the life of the loan, an adjustable-rate mortgage (ARM) comes with interest rates that fluctuate. Your interest rate depends on the current market conditions.
When you first take out an ARM, you will typically start with a fixed rate for a set period of time. Once that introductory period is up, your interest rate will adjust on a monthly or annual basis.
An ARM can be a suitable option for some borrowers because your interest rate will likely be low for the first couple of years you own the home. But you need to be comfortable with a certain level of risk.
And if you choose to go this route, you should look for an ARM that caps the amount of interest you pay. That way, you won’t find yourself unable to afford your monthly payments when the interest rates reset.
4 Types of ARMs
There are 4 different types of adjustable-rate mortgages typically offered:
One Year ARM – The one-year adjustable-rate mortgage interest rate changes every year on the anniversary of the loan.
10/1 ARM – The 10/1 ARM has an initial fixed interest rate for the first ten years of the mortgage. After 10 years is up, the rate then adjusts each year for the remainder of the mortgage.
5/5 and 5/1 ARMs – ARMs that have an initial fixed rate for the first five years of the mortgage. After 5 years is up, for the 5/5 ARM, the interest rate changes every 5 years. For the 5/1 ARM, the interest changes every year.
3/3 and 3/1 ARMs – Similar to the 5/5 and 5/1 ARMs, except the initial fixed-rate changes after 3 years. For the 3/3 ARM, the interest rate changes every 3 years and for the 3/1 ARM, it changes every year.
Pros:
Interest rates will likely be low in the beginning.
If you pay the loan off quickly, you could pay a lot less money in interest.
Cons:
Your monthly mortgage payments will fluctuate.
Many borrowers have gotten into financial trouble after taking out an ARM.
Choosing the Right Home Loan
When it comes to choosing a home loan, you need to consider a few key factors. First, you’ll want to think about the type of loan that is best suited to your needs.
Fixed-rate mortgages offer stability and predictability, while adjustable-rate mortgages (ARMs) can be a viable option for those who expect their income to increase significantly over time. You’ll also want to consider your budget and how much you can afford to borrow, as well as the size of your down payment and the length of the loan term.
It’s also crucial to shop around and compare offers from multiple mortgage lenders. While it’s tempting to go with the first lender you find, it pays to do your homework and see what other options are available.
This can help you get a better rate and more favorable terms on your loan. It’s a good idea to get quotes from at least three different lenders, and to consider both traditional banks and online lenders.
Tips for Getting the Best Rates and Terms
One of the most effective strategies is to improve your credit score. Lenders look closely at credit scores when deciding whether to approve a loan. Those with higher scores are typically offered better terms. You can improve your credit score by paying your bills on time, reducing your debt, and correcting any errors on your credit report.
Another tip is to make a larger down payment, which can help you secure a lower interest rate and reduce the size of your monthly payments. Finally, consider working with a mortgage broker, who can help you shop around and find the best deal.
Bottom Line
As you can see, there are many home loans for you to choose from. The type of mortgage that’s best for you will depend on your current income and financial situation.
If you’re not sure where to start, consider working with a qualified loan officer. They can assess your situation and recommend the option that will be best for you.
Veros Real Estate Solutions released their quarterly review of forecasts for the nation’s real estate market in 2008 today, highlighting a handful of hot and cold markets.
The analysis, which covers the period of December 1, 2007 through December 1, 2008, uses more than 50 factors to examine and develop the pricing trends, including interest and unemployment rates, inventory, inflation, geographical information, and other factors.
Per the report, Veros predicted that the five strongest markets in 2008 will be Wichita, Kansas, with an expected increase of four percent, along with Raleigh/Cary, North Carolina, Sioux Falls, South Dakota, Fargo, North Dakota, and Tulsa, Okalahoma, all seeing gains of three percent.
“The central part of the nation has thus far been largely unaffected by the rapid price appreciations that were seen in many other geographic areas. Consequently, this region is moving forward without distress from the depreciation felt elsewhere and is experiencing minor growth,” the report said.
The predicted five weakest markets include some of the nation’s most heavily-populated regions, including: Sacramento/Roseville, California, expected to fall 12 percent; Cape Coral/Ft. Myers, Florida, slated to drop 13 percent; Palm Bay/Melbourne/Titusville, Florida, forecast to drop 14 percent, and the Riverside/San Bernardino and Modesto, California markets, both predicted to fall 15 percent.
“The heavy decline in the coastal markets, California and Florida, is due to the extended time properties remain on the market, combined with the excess residential inventory much of which is in condominium projects purchased speculatively.”
“Also contributing to this decline is the need of sellers to dispose of their properties by lowering prices, often more than once.”
According to Veros, “the numbers reflect both the current and anticipated prospective impact of the current mortgage credit ‘crisis’.”
The Santa Ana, CA-based company has been developing and releasing these quarterly forecasts since October 2003.
Both the Office of Federal Housing Enterprise Oversight and the Treasury urged Congress today to consider GSE reform with the increase in the conforming loan limit looming.
“OFHEO believes any increase in the CLL should be coupled with quick enactment of comprehensive GSE reform,” OFHEO director James Lockhart said. “The CLL provision in the stimulus package would increase the Enterprises risks by allowing them to enter the “jumbo” loan market.”
“The key question is whether Fannie Mae and Freddie Mac will be able to continue to support the conforming mortgage market in a safe and sound manner while assuming additional responsibilities in the subprime and jumbo markets.”
Lockhart noted that Fannie and Freddie would be supporting some of the riskiest real estate markets in the nation, such as California where nearly half of the jumbo loans are originated.
He also mentioned that capital would be challenged with larger loan sizes, and varying loan limits nationwide would call for “additional operational challenges.”
Meanwhile, Assistant Treasury Secretary David Nason told the Senate Banking Committee to create a new federal regulator for Fannie and Freddie that has the authority to review all the risks involved.
“The housing GSEs’ regulators have neither the tools, nor the resources, to deal effectively with the current size, complexity, and overall importance of these enterprises,” Nason said.
“The new housing GSE regulatory agency must be provided (with) specific review authority over the retained mortgage portfolios of Fannie Mae and Freddie Mac.”
“Such authority must establish a clear and transparent process based on guidance from the Congress on how the new regulatory agency will evaluate the retained mortgage portfolios in terms of risk and consistency with mission,” he added.
Nason noted the importance of such a role, as the GSEs have become the key support of the mortgage industry and the only reliable source of funding for home loans.
“It is paramount that the housing GSEs properly manage and supervise the risks they undertake and that a strong regulator oversee their operations,” he said. “Otherwise their solvency could be threatened and this could have a negative impact on the stability of other financial institutions and the overall strength of our economy.”
Meanwhile, Senator Dodd said he wants the GSEs to play an active role in the subprime market, using its 30% capital surplus to buy and restructure subprime loans to help stem a rise in foreclosures.
“We need to get down to the hard work of crafting a balanced bill that will create the kind of regulator we all agree is needed,” Dodd said.
“I believe the GSEs need to do more to help subprime borrowers get out of their abusive subprime loans and into safer, more affordable and stable products,” he said.
I’m assuming it’s gonna be all about fixed mortgages going forward.
Texas is a famously vast state, with real estate markets as diverse as its geography. Affordable living opportunities abound in the Lone Star State, making it a compelling choice for renters seeking high quality of life at a low cost. Improved housing affordability benefits communities across the state, contributing to economic growth and diversity. The cheapest places to live in Texas often combine low rental costs with other desirable qualities like quality infrastructure, great amenities, and a strong sense of community. These locations offer a good balance of affordability and desirability, which is why they are considered the cheapest places to live in Texas. The cities that meet these criteria include Mercedes, San Benito, Levelland, Marshall, and Pampa.
Mercedes, TX
Mercedes, known as “The Queen City of the Rio Grande Valley,” is one of the oldest cities in South Texas and offers a budget-friendly lifestyle with a population of around 16,561. Its median income stands at $39,734, and the median home value is $74,400. With a 2-bedroom asking rent of $575, living in Mercedes is indeed affordable. At the same time, it is home to numerous parks like the Mercedes City Park and Hinojosa Park, which add to the city’s charm. Boasting a high score of 98.0785 in terms of livability, Mercedes offers a blend of affordability, history, and community spirit.
San Benito, TX
San Benito, located in the heart of the Rio Grande Valley, is a city with a population of 24,259. The median income in this city is $30,565, with a median home value of $59,300. For renters, the 2-bedroom asking rent stands at a modest $695. San Benito is known for its vibrant culture and rich history, with attractions like the Freddy Fender Museum and the Narciso Martinez Cultural Arts Center. With a score of 94.6906, San Benito offers an affordable cost of living without compromising on quality of life.
Levelland, TX
Situated in Hockley County, Levelland is a small city with a population of approximately 13,566. The city’s median income is $45,196, while the median home value stands at $100,500. The 2-bedroom asking rent in Levelland is relatively low at $727. Known as “City of Mosaics,” Levelland is home to South Plains College and is renowned for its public art installations. With a score of 93.0626, Levelland combines affordability, excellent education opportunities, and a strong sense of community.
Marshall, TX
Marshall, a city with a population of 22,881, offers a median income of $42,467 and a median home value of $104,400. With a 2-bedroom asking rent of $700, Marshall is a practical choice for renters. This historic city boasts the Michelson Museum of Art and the Starr Family Home State Historic Site, along with beautiful colleges like East Texas Baptist University and Wiley College. With a livability score of 91.3674, Marshall presents a low cost of living while maintaining a rich cultural heritage and strong community feel.
Pampa, TX
Pampa, a city with a population of 17,226, stands out with its higher median income of $53,535. The median home value in Pampa is $78,500, and the 2-bedroom asking rent is $774. Pampa is a friendly, vibrant community with attractions like the White Deer Land Museum and Pampa H20 Aquatic Center. With a score of 90.5864, Pampa sets itself apart by offering an affordable lifestyle along with unique cultural and recreational opportunities.
Methodology
The cheapest cities in each state were ranked based on its median home price and median asking rents for studio, one-, two-, and three-bedroom units. Prior to ranking, inputs were normalized, and weights were applied using a 1.25:1 ratio of asking rents to home prices. Data on home prices are from the U.S. Census 2016-2020 American Community Survey 5-year estimates. Data on asking rents are from Rent. Cities without data for one- or two-bedroom asking rents or a population of less than 10,000 were removed from this ranking. Any other missing values were zeroed and did not impact the final score.