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Determining Your Down Payment

When you’re considering the purchase of a home, a very important and not always easy thing to consider is the amount of a potential down payment.  What you choose to make as a down payment affects not only your term, but the interest you pay.  In order to set a payment schedule that you can comfortably live with, you will have to put down enough up front to justify the particular term and rate you choose.  However, money doesn’t grow on trees and you may not think that you have enough to put down in the first place.  The good news is that it may be easier than you think.

Private Mortgage Insurance

Even if you’re good at saving, coming up with a down payment can be a headache.  One thing to consider is that if you pay less than 20% as a down payment, you’re usually required to purchase PMI (private mortgage insurance).  This protects the lender in case you are forced to (or choose to) default on your loan, and it could be up to 1% of the loan amount.  If you can’t pay your mortgage, it protects your bank or lender.  Normally the institution that loans you the money will choose the carrier for private mortgage insurance.  This insurance does not increase your equity, and the beneficiary is the person lending you the money, not you.  However, you can get this amount rolled into your monthly mortgage payments to make it easier to manage.  Once you’ve built up enough equity in your house, you will no longer be required to pay this insurance.

Higher Down Payment

If you’re able to be creative about coming up with a 20% (or higher) down payment for your house, you can easily avoid having to pay PMI.  If you are able to put down a significant amount, you will in most cases be able to lower your monthly payments, which can cause you a lot less heartache later.  Though it does require you to stretch a bit more in the beginning to come up with a lump sum, it will make things easier for you over the remaining years on your mortgage payments.

Assistance

Some of the ways you can be creative about coming up with your down payment include government agencies (federal, state, or local), non-profit organizations, employers, family members, and private foundations.  Sometimes there are even additional options for people with low incomes who live in high cost areas.  You should also check out homeownership education programs, which not only help you become better informed about what you’re getting into, but may be very useful in helping  you manage down payments and future mortgage payments.

Options

Finally, depending on the type of mortgage you get, you may be able to get by with a lower payment.  If you choose a fixed mortgage versus and adjustable mortgage, this can open new options up to you.  It’s best to consult your financial institution or lender to find out what sorts of programs they have available.  They may be able to offer you assistance in a variety of ways, understanding the difficulties associated with coming up with large down payments.  Your insurance company may be able to offer you different suggestions on mortgage options as well. 

Even if you can’t come up with a substantial down payment in order to lower monthly rates, many lenders will have options available, even if you’re only able to pay 5% or less.  Talk to your local financier to find out more about what options are available to you.

David Nance is a freelance writer who recently took advantage of the historicly low interest rates to refinance his house. He used the services of a broker found at http://www.personalhomeloanmortgages.com/broker/.


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