For many would-be homebuyers, the biggest hurdle is coming up with the down payment. Most mortgages require a specified percentage of the total cost of the home in order to receive a loan.
In recent years, a 20 percent commitment has been the norm for down payments. That means if you’re buying a $300,000 home, you would need $60,000. Some lenders will allow a lower percentage down if you meet certain criteria. If you’re considering buying now with a smaller payment up front to take advantage of today’s attractive interest rates, you’ll need to consider the possible effects:
- Having cash available for other expenditures: If you’re gearing up to send your child to college in the next year or two, you might want to have a chunk of money in savings rather than tied up in your house. If you put 5 percent down on that $300,000 home, you’ll be putting down $15,000 — quite a difference from the $60,000 required for a 20 percent down payment.
- How much interest you’ll be paying: The less you put down, the larger the loan amount and the more interest you’ll be paying. When you’re paying a lot toward interest and less toward the actual loan amount, it will take longer to gain any equity in your home. Equity is the difference between the value of the home and what you owe. Ideally, as you make your loan payments, the market stays healthy, home values increase and you’ll gain equity.
- What your monthly payment will be: When you put down a small down payment, that means your monthly payments will be higher than what they would be if you had put down a heftier down payment. Will you be able to afford the month-to-month commitment?
- Private mortgage insurance: Generally, if you put down less than 20 percent, your lender will require you to pay private mortgage insurance (PMI). This is a policy that protects your lender in the event you default on your loan. Your lender can tell you how much PMI will be based on the amount of your loan. You’ll need to budget that along with your monthly mortgage payment.
The decision of how much money to put toward a down payment will always be personal based on your budget and financial situation. If you need help to determine the best down payment option for your situation, contact a mortgage loan officer to help you assess your options.
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