A conventional mortgage typically requires a 20% down payment on the purchase price of the home. In some cases, buyers may only be required to put 0% and 15% down, depending on their circumstances. A low down payment can make it possible for first time home buyers to get into the real estate game. FHA loans will typically grant mortgages with as little as 3.5% down, and if you qualify for the VA home loan you can qualify with no down payment. Mortgage Insurance and combination loans offered by local community banks provide additional financing options with minimal or even no down payment. But if you’re saving up to buy a home keep in mind that bigger is always better when it comes to a down payment on a home. Use a down payment calculator or monthly payment calculator to anticipate how big your down payment needs to be for the purchase price of the home and the payments you want.
When a Bigger Down Payment is Better
An article in MSN Money outlines 5 reasons why a bigger down payment is in your best interest.
Lower Monthly Payments – The bigger down payment you are able to put towards your home purchase the lower your monthly payment will be. Not only will this help you with monthly budgeting but it will also save you thousands in interest charges. For example, if you have an interest rate of 5% and you put an extra $10,000 down on your home purchase it will save you more then $9,000 over the 30 year life of the loan.
Better Interest Rate – When you put down the full 20% your lender will be able to offer you a better interest rate. A lower interest rate will save you money in your monthly payment as well as over the life of the loan.
Avoid PMI – When you don’t own 20% of your home, lenders will require that you take out personal mortgage insurance which protects them in the event that you default on your loan obligations. You will be required to pay PMI until you have paid down your mortgage or the value has increased so that you own 20% equity. PMI is calculated based on the value of the home and is typically added to every monthly payment.
Financial Security – The benefit of owning 20% of your home is that you have some financial stability and flexibility when it comes to selling your home and riding out a financial crisis. Having equity in your home makes it possible for you to sell it if need be. Home values fluctuate all the time and values may dip a little after your purchase. If you have no equity in your home you can quickly become upside down in the loan. The more equity you have the better off you will be.
If you are preparing for a new home purchase consider how much your down payment may be and how that will effect the life of your loan. Use a down payment calculator and monthly mortgage calculator to figure out how much you are comfortable paying. The team at Title Mortgage will sit down and help you understand how a big down payment will change your circumstances. Contact us to learn more!