What Size Should Your Mortgage Down Payment Be?


As if buying your first home wasn’t stressful enough with inspections and appraisals, you also have to worry about financing. One of the most important decisions in the financing process will be how much of a down payment to make. Luckily, there are clear-cut advantages and disadvantages to putting certain amounts down.

You’ve probably heard media reports that you should make a 20 percent down payment. Why?Twenty percent is ideal

You’ve probably heard media reports that you should make a 20 percent down payment. Why? For the borrower, 20 percent down usually will qualify you for a slightly lower interest rate than someone who makes a smaller down payment. Another benefit is that you will borrow less money, making your monthly payments smaller. Additionally, you will have 20 percent equity in your home right off the bat, meaning that should you unexpectedly need to sell, you’ll have more room to negotiate. On the other hand, should you need cash later for some other expense, that equity could provide collateral for a loan..

One more advantage for buyers with a 20 percent down payment is that they will not have to pay premiums for private mortgage insurance (PMI), which is typically required for conventional loans involving less of a downpayment.

On the other hand, 20 percent of the average home price in the nation ($200,000) is $40,000. Saving up that much cash, plus the additional cash you will need for closing costs, moving fees, etc., can take more than a handful of years. All the while, the housing market may see prices and interest rates increase, making it even harder on buyers.

Pros and cons

There are loans available that require as little as three percent down. This could be great, as you will obviously not need to save up as much money and can become a homeowner much faster. However, significantly smaller down payments do have their disadvantages as well:

  • You will have to pay PMI to your lender, which increases your monthly payments. Depending on the loan, the PMI will need to be paid until you reach 20 percent equity, or sometimes even for the duration of the mortgage.
  • Your home loan will be larger, making your monthly payments larger as well.
  • Your interest rate will be slightly higher, too, compared to someone who makes a 20 percent down payment.
  • One of the factors that Lenders analyze is the Borrower (s) Debt to Income ratio—or, the amount of recurring monthly obligations you have divided by your verifiable monthly income.   In today’s world, that maximum “DTI” is 43%.  Included in the “numerator is the mortgage payment plus property taxes and homeowners insurance as well as car loans, student loans and other installment or revolving debt.  therefore, a smaller down payment may make it harder to qualify for a loan at all depending on your income and total obligations.

Ultimately, the decision about the size of your down payment depends on a variety of factors, which can be weighed only by you, the buyer/borrower. Consult with a lender to evaluate your individualized loan options and make the best choice in the context of your individual financial plan.

 

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