Home Mortgage

It's not always easy to save up enough to make the traditional 20 percent down payment on a home. The good news is that there are quite a few low down payment mortgages available nowadays. But when deciding how much to put down, you should consider the following: Is 20 percent the standard down payment?

In order to qualify for a conventional mortgage, lenders usually require a minimum down payment of 20 percent. If you put down less than 20 percent, most lenders will require you buy Private Mortgage Insurance (PMI). This insurance typically costs about one half of 1 percent of the purchase price of the home and protects the lender in the event that you should default on the loan. Your overall mortgage costs will therefore be less if you come up with 20 percent down and can avoid having to pay PMI.

What if you put down less than 20 percent? If you can't afford a 20 percent down payment, paying PMI may be your best option. And once you reach 22 percent equity in your home (or sometimes 20 percent equity with a good payment history), you can get your lender to cancel the insurance.

Another option available to you is securing an 80/10/10 loan. It enables you to avoid PMI by financing half of the required 20 percent down payment with a second mortgage. 80/10/10 loans work on the principle that the bulk of the selling price of the home is paid for through the first mortgage, with 10 percent being paid off with a down payment, and the remaining 10 percent being paid off with another mortgage. You may also pay off the 20 percent down payment with an FHA loan that you secure from the government. Again, you will have to pay for insurance, but you may qualify with a down payment as little as 3 percent.

What about putting down no money at all? There are actually some financing plans available that will allow you to pay for the full cost of the home without having to pay any down payment. The downside is that these types of financing plans will entail much higher interest rates than typical mortgage arrangements. This means your monthly mortgage payment will be higher. Also, because you didn't make the standard 20 percent down payment, you will have to pay PMI.

Let us look into other payment alternatives available to you. When trying to determine how much to put into the down payment, you should explore your various options in order to find a plan that will best suit your circumstances.

Q: Would you prefer getting instant equity in your home and lowering your monthly mortgage payment? If so, paying the 20 percent down payment is your best alternative.

Do you want to save on paying PMI costs but are unable to raise the 20 percent down payment? An 80/10/10 loan may then be your best option.

Q: Can you only come up with a 3 percent or 5 percent down payment and don't want to wait to buy a home because you are concerned about rising house prices? A: Maybe a government insured FHA loan would be a good answer.

Are you unable to raise enough money for any down payment but are willing to incur the extra expense of a no down payment mortgage plan? A: Provided you are able to handle the required payments and are confident your financial situation will enable you to refinance for a mortgage with better terms in the future, it could be the way to go. The important thing is to evaluate your own situation carefully before you decide how much to put down on a home.

Article Author: Al Zan