Sunday, January 5, 2014

How much down payment should you make on a new home mortgage?

It should go without saying that the bigger the down payment you make on a new home, the more home you’ll be able to purchase, and the less you’ll end up paying overall for the home. The trouble is that very often, home buyers find it a little tough to come up with the tens of thousands of dollars required to make that down payment. With budgets tight these days, it can be downright impossible to save up the $30,000 needed to put down 20% on a $150,000 home. In areas where average housing prices can quickly top $600,000 or more, that 20% can seem like an insurmountable obstacle to home ownership. Can you put 20% down? What if you can only get a few thousand dollars together? In what cases will that be sufficient?

The down payment is really a balancing act, and what I mean by that is that while it is technically possible for you to obtain a mortgage with little or even nothing down in some cases, you might be doing yourself a disservice by doing so. After all, the down payment does more than just open the door to a mortgage for you. First off, the down payment may in itself help you to get a mortgage, particularly if you’re a first-time homebuyer. If you offer little or nothing down, then the banks that you are attempting to do business with might be less likely to want to extend you credit. By the same token, they might also limit how much they’re willing to loan you, putting the house of your dreams out of reach. Secondly, the down payment significantly reduces your monthly mortgage payment. For instance, let’s say you’re going to put $75,000 down on a $400,000 home.  At a 5% interest rate for 30 years, you’re looking at $2160 per month, give-or-take. Running the numbers at $10,000 down, however, puts your monthly payment at $2510, a difference of $350. Doesn’t sound like much, you say? Try this on for size: That difference will save you $43,000 over the life of your loan. Sounds pretty good now, doesn’t it?

The down payment is a personal thing, though. Sure, it is very much about how much you can afford and how much house you want to buy, but there is more to it than just that aspect. For instance, how comfortable in your job are you? If you’re pretty set up, you might be more comfortable with a higher monthly payment and lower down payment. If you’re retired, though, you’ll probably want to think about making sure that your monthly payment is as low as possible, just in case you run into other issues during your retirement that need to be attended to. After all, that trip to London isn’t going to pay for itself, is it?

Yet another aspect to the down payment is, of course, PMI. Private Mortgage Insurance helps protect the lender from default on the loan, and if you put down less than 20 percent of the home’s value, chances are you’re going to have to pay it. It doesn’t usually seem like much, but it’s a big chunk of change. In the above example, the PMI would be calculated to an extra $162 added to the monthly payment, culminating in a grand total of $18,850. All paid by you until the equity in the home you buy reaches 22 percent of the amount financed. So, the $43,000 saved above suddenly becomes a savings of $61,850 over the life of the loan.

Our society has conditioned us to believe that we can life in debt and be happy, but there are a host of studies that have told us that “society” is full of it. We want to be solvent. We want our stuff paid off so that there aren’t any bills coming in the mail. After all, who dreams of sitting in their home’s new office filling out stacks of bills? While the down payment is a matter of what you can afford, it can be easily distilled into a simple fact that’s easy to see when you really take the time to look: Paying more for the down payment will make you happy in the long run. Paying less will eventually make you unhappy. With that in mind, who wouldn’t want to save up a bit longer for that house they want?

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