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Down Payment on a House

down-payment

Real Estate

Down Payment on a House

Most people borrow funds for buying a house. But you still need some cash on hand for making your down payment.  There is a lot of contradictory information regarding the appropriate amount of the down payment. We will look into the usual amount of down payment in case of a home purchase, discuss PMI, how to save for your down payment and assistance given to first time home buyers.

Mortgage Trends

According to statistics released by Realtors Association, more than 80% of home buyers used some type of mortgage financing in 2016. This figure has not fluctuated much since 2014, but is a sharp decline from previous surveys, which suggest that even more individuals relied on mortgages in the past.

Another important trend has emerged that indicates traditional loans have overtaken FHA loans as the main type of mortgage in home buying decisions. This has an important link with down payment amounts. The increased use of conventional loans means that amounts of down payment have increased considerably. Conventional financing requires at least 5% as down payment.

Higher Down Payments Mean Cheaper Mortgage

Home buyers who use conventional loans have a strong desire to pay more than the minimum 5%. With every additional 5% put down, the terms of the loan become more favorable. This translates into a decline in the fees, rate, and costs of mortgage insurance.

Traditionally, the typical and expected down payment for a home purchase transaction was 20%. With this number, a mortgage lender usually feels comfortable lending to a home buyer as they are in a position to forgo the extra protection offered by mortgage insurance.

However, with the sharp rise in home prices, it is not practical for a first time home buyer to save up to 20% of the asking price. Therefore, the average amount of down payment for first time home buyers has now dropped to between 5% and 10%.

Down Payments and PMI

It is a no-brainer that a higher down payment amount means a reduction in your mortgage payments and you will owe the lender a lower amount.  It is equally important to know that home buyers, who manage to put down a minimum of 20%, do not get burdened with Private Mortgage Insurance (PMI) expense. This is an additional insurance policy for protecting your lender in case you fail to repay your mortgage.

As a home buyer, you make monthly PMI payments, which is revenue for the lender. These payments can deplete your savings, leaving you with little financial cushion. The PMI costs vary depending on the loan-to-value ratio and your credit score. However, you will usually pay between $40 and $70 monthly for every $100,000 borrowed.

Saving for Down Payment

Saving for your down payment may feel like a herculean task, as 20% of a home’s purchase price is a huge sum. But you have a couple of options for saving the cash you need. Don’t resort to extremes and instead focus on small actions that can have a major impact.

Cutting back on your expenses is the basic place to begin; every expense you eliminate will contribute to your savings. Cancel unnecessary services and subscriptions from your budget and look for discounts and rate reductions when possible.

You can also experiment with your home-buying timeline. Saving for a massive $70,000 down payment in just one year is tougher than saving the same amount over 3 years. If you intend to purchase a home, but don’t want to compromise your lifestyle, play with your timeline. There is no rule that says you have to purchase a home right now.

You can also save much faster if you pay off amounts you have racked up in credit card debts. Don’t expect to save much money if you are paying interest to someone else. Begin with your high interest debts and repay them. In addition, you will not be able to qualify for a mortgage in the first place if you have too much consumer debt.

First Time Home Buyer Assistance

You want to climb up the property ladder, but what if you don’t have that 20% down payment? Don’t worry as you have a number of options up your sleeve, irrespective of whether you are a country-dweller or a city-slicker.

In case you are a first time home buyer, you can make an application for an FHA loan. The result is that you can secure a mortgage with as low as 3.5% down payment and low interest rates.

You can also try city programs. Numerous cities provide down payment assistance to their residents.

For instance, a program known as Invest Atlanta provides up to $20,000 in mortgage assistance to its residents who purchase a house with City of Atlanta limits. Similarly, in San Francisco you will get first time home buyers assistance up to $200,000.

If you are a military veteran you can avail a mortgage with no down payment, thanks largely to the Department of Veterans Affairs. This loan is federally-insured and is provided to veterans who have a good credit history and no PMI payments are applicable on these loans. In addition, these loans restrict the amount of money that a bank can charge for closing costs, which gives you inherent protection from ancillary fees.

If you are not an urban resident, you may secure a loan insured by the Department of Agriculture in US. Similar to veteran loans, they enable you to buy a home with no down payment. But, in this case you will have to pay PMI.

Bottom Line

If you are looking to purchase a home, paying a low amount of down payment, could be a feasible option. It is an easier way of acquiring a home and building equity. You will need some preparation, so be ready for it. However, after a couple of years you will be better positioned to refinance to a favorable loan.  Traditional loans usually allow you to get rid of the mortgage insurance expense without refinancing. All you need is show a high value with your new appraisal.

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