Also, are there any state home buying programs that make putting less than 20% down a "less-bad" financial decision? Hope that makes sense.
Yes, there are programs that help with low down payments. They are for first-time home buyers and good rates. FHA (Federal Housing Administration) loans are with the feds, and there may be some state options available as well. (
https://www.hud.gov/states/massachusetts/homeownership/buyingprgms)
I used an FHA loan. If you are a veteran, you may qualify for a VA loan, too.
My understanding is that, when you only put 5% down, your APR will be higher than it would be if you put 20% down. Is the strategy to refinance the house after you have 20% equity?
Your rate will actually be better using a government program. However, you will be hit with PMI, and sometimes you will be stuck with PMI for the life of the loan. So one would have to refinance (get a new loan) at 20% or more equity if PMI is not removed automatically.
What is the strategy (or what do I need to look out for) when buying a house with only 5% down?
Generally with a government loan the lending requirements are more strict. The appraiser might have an issue with seemingly simple things, like peeling paint or torn up carpeting. I guess the reasoning is because they want to make sure the home buyer is protected against major renovation repairs, and they want to make sure everything is affordable with such a low down payment. So you may want to look for a house that isn't a total fixer upper.
But if you did want a fixer upper, there is another program you can use called a 203k. It's basically a renovation budget that gets rolled into your mortgage. It lets you fund renovations up to $60k. I never did this, but I heard it's very bureaucratic and tedious. You have to hire certain 203k certified contractors to do the work. And the loan could take a very long time to close.
Personally I think buying a multi family is the only way a low down payment purchase makes sense financially. You are in essence buying an investment property for as low as 3.5% down. Ordinarily you'd need 25% down for one, so you get some really good leverage. The best part is, you only have to live in the place for 365 days after closing. After that, you could move out of the unit and rent it for the rest of your life if you wanted.