Check your understanding

Check your understanding of key concepts before moving to the “Do it yourself” section.

Indicate whether each statement is True or False.

1. The larger your down payment, the less you have to borrow, and therefore, the lower your monthly payments.

Correct! The less you borrow, the lower your monthly payments, and the less interest you pay over the life of the loan.
Incorrect. The less you borrow, the lower your monthly payments, and the less interest you pay over the life of the loan.

2. In the wake of the subprime crisis, more and more lenders are offering 100% financing.

Correct! Due to the subprime lending crisis, fewer lenders are willing to lend to homebuyers who have no down payment.
Incorrect. Due to the subprime lending crisis, fewer lenders are willing to lend to homebuyers who have no down payment.

3. If your debt-to-income ratio is above 40%, it's best to use savings for a down payment, as opposed to paying down debt.

Correct! If you have a good job and are concentrating on paying off debt, it probably makes sense to put something into the savings account instead. But, if your debt-to-income ratio is above 40%, work on paying off debt until your debt-to-income ratio falls below the 40% mark. Once you've done that, you should focus on accumulating at least a 5% down payment.
Incorrect. If you have a good job and are concentrating on paying off debt, it probably makes sense to put something into the savings account instead. But, if your debt-to-income ratio is above 40%, work on paying off debt until your debt-to-income ratio falls below the 40% mark. Once you've done that, you should focus on accumulating at least a 5% down payment.

4. It is possible to secure a 1st loan for 80% of the value of a home, and a 2nd loan for the other 20% of the value of a home, thereby avoiding PMI.

Correct! You can pursue a "piggyback" transaction: a 1st loan for 80% of the home's value, and a 2nd loan for the other 20%. There is nothing wrong with this kind of transaction and it is very popular as PMI is not typically required. Usually the 1st must be a 30-year fixed rate loan, but there are a large number of fixed rate and variable rate options for the 2nd loan.
Incorrect. You can pursue a "piggyback" transaction: a 1st loan for 80% of the home's value, and a 2nd loan for the other 20%. There is nothing wrong with this kind of transaction and it is very popular as PMI is not typically required. Usually the 1st must be a 30-year fixed rate loan, but there are a large number of fixed rate and variable rate options for the 2nd loan.

5. You can eliminate PMI as soon as your home appreciates to the point where your loan equals 80% of the new, higher, value of your home.

Correct! You can also eliminate PMI as soon as your home appreciates to the point where your loan equals 80% of the new, higher, value of your home.
Incorrect. You can also eliminate PMI as soon as your home appreciates to the point where your loan equals 80% of the new, higher, value of your home.

Practice what you learned Do it yourself

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