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11 Sep

Understanding Down Payments When Buying A Home

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Posted by: Roberto Pelaccia

One of the biggest hurdles when you’re looking to purchase a home is coming up with the down payment. This is on top of all the other expenses people have in their day-to-day lives. But, at the end of the day, it’s something that needs to happen to become a homeowner.  Most people think that having a 20% down payment really has its benefits.

In this article, I am going to through some of the reasons why people should take a look at their finances, so that they can effectively decide what size of a down payment is right for them.

1. Save more up front to pay less per month

The reality is, the more you save for a down payment, the less you have to pay per month on your mortgage. The simple math shows that the more you put down means the less you borrow and the less you have to pay back. The challenge is saving more to put down and still have more for other things you’d like to invest in or do.

2. Mortgage default insurance

If you have less than 20% for a down payment, you are required to have mortgage default insurance. This allows the banks to give mortgage applicants who have less than a 20% down payment lower interest rates, as that default insurance decreases the bank’s cost to lend and they pass that down to the borrower. The lower your down payment, the higher your insurance premium will be though. Typically between 5-10% down-payment means you will pay 4% of your loan amount as the premium, and a low interest rate of 2.8% if you have 15%-19.99% down.  Most people pay for the insurance by adding it to their mortgage, which they will therefore pay over the course of their mortgage. If you have 20% or more you can avoid this extra expense.

3. Lower Interest Payments

Pure interest savings can be achieved with a lot of different strategies. Your sticker rate is typically lowest with more than 20% down payment.  

4. Easier To Debt Service

Having a down payment that 20% or more can make it easier to qualify for a mortgage. You can extend the amortization of the mortgage up to 30 years, which can make your payment lower.  Banks want to know that you will be able to successfully service your debt, and they believe you can do that by looking at whether or not your monthly housing costs are below 39% of your combined gross monthly income and if your total debt accounts for less than 44% of your gross monthly income. A lower mortgage payment can help you get there.  

 

As you can see, there are some real pros and cons to having more or less of that key 20% down payment when you go to purchase a home. If you’d like to understand your options, or if you like to talk about planning your finances so you can get the right down payment amount, then feel free to get in touch with me.