Down payments are important and you have options.
Low Down Payment Purchase Options
For many people who are considering buying a home, knowing how much money to use as a down payment can be a very confusing and overwhelming issue.
The best route depends on your situation and personal preference. Below are four issues that all home buyers and investors should explore when considering which down payment option is best for them.
Please consider the information below as an opportunity to explore your many options. Discussing your personal situation with a qualified team like the one at LifeSource Mortgage will help determine the best option for you. This list and information is not designed to steer you toward any particular program. The goal is to expose you to the options you should consider when purchasing a home or investment property.
Down Payment Options
All conforming loans will require certain minimum down payments, as will some of the available alternatives with non-conventional (FHA loans) programs that might be available based on your circumstances and specific location. To find out more about the many mortgage options available to you, contact LifeSource Mortgage.
As an example for many minimum down payments, you can typically purchase a single-family home or condominium with as little as 3.5% down on the agreed upon purchase price. In many cases additional fees and costs may also apply. For example, mortgage insurance (often called PMI, private mortgage insurance) will be required with low down payment mortgages.
PMI is required when the conforming loan amount is MORE than 80% of the purchase price (in other words, when your down payment is less than 20%). Generally speaking, the lower the down payment, the higher the premium ratio in your mortgage.
Veterans of the U.S. Armed Services who qualify for a VA loan are one of many examples of people who have the easiest route to buying a home with little money down. VA loans can provide up to 100% financing for qualified military personnel and veterans. There are many other occupations and circumstances that offer similar benefits. To find out more, contact a qualified and experienced team like LifeSource Mortgage.
There are some additional non-conforming mortgage loan programs that allow for 80/20 options, which allows borrowers to obtain a second mortgage to cover their 20% down payment.
USDA home loans allow you to buy a home with 0% down. However, They’re geared toward lower-income home buyers in areas deemed rural by the U.S. Department of Agriculture, the agency that guarantees these loans. These are amazing loans because they have low interest rates, low PMI (actually called Guarantee Fee for USDA) at just .35% per year, and of course, zero down.
Regardless of your credit and income situation, you often have many options that may allow you to purchase a home with no money down.
Also, you can use a reverse mortgage to purchase a home. It requires a larger down payment that varies depending on your age. This strategy is great for someone looking to downsize. It would allow you to buy a home and not have a mortgage payment, similar to paying all cash. The difference is, if you do a reverse mortgage, you get to keep MORE of your cash, yet you still don’t have a monthly mortgage payment.
Cost of a Lower Down Payment
Putting less than 20% or utilizing a zero dollar down payment program will generally have two primary costs:
- Higher Interest Rates
- Higher Mortgage Insurance Premiums
Mortgage insurance is calculated against the loan amount, and determining how much your mortgage might be can only be done with a qualified and experienced mortgage professional.
Mortgage insurance may be removed once you have earned sufficient equity. Generally, your property will need to show at least 20% equity. At that point, your mortgage insurance can be refinanced away.
Also, lower down payments generally means a higher loan amount, which translates into higher monthly payments. This along with many other factors need to be considered when you qualify for your mortgage.
Consider, for example, the purchase of a $100,000 home with 6.5% interest:
- 5% down, $95,000 loan and a monthly payment of $600.46.
- 10% down, $90,000 loan and a monthly payment of $568.86.
- In this case, putting down an additional $5,000 will save you $32 per month, which will save you much more money over the course of the loan.
During the first few years of your mortgage, the bulk of your payments go directly to pay the interest. You can generally deduct interest payments from your taxes. Hence, you actually get a bit of your monthly payments back in the form of tax deductions.
Benefits of Lower Down Payments
The benefits of a lower down payment include:
- Less money out of pocket means higher liquidity.
- A potential higher rate of return. A property’s appreciation has nothing to do with the amount of money you put down.
- Opportunity cost. Some investors make more money from available cash by diversifying their investments. (Use caution).
Deciding how much money to put down on a home is a big decision and should involve considerable thought and the assistance of a qualified mortgage company. Calculations based on monthly payments, affordability and your overall goals are crucial.
Lenders will qualify you for certain programs based on your credit score and income, but at the end of the day, you need to understand what you are committing to and be comfortable with it. LifeSource Mortgage is glad to help you understand all of your options. We want to make sure you secure the loan that will be most beneficial to your circumstances.
In some cases, home buyers are qualified for a mortgage that is higher than they are comfortable paying. The best way to satisfy this is to increase the amount of money down to then decrease the amount you pay per month. That, or find a less expensive property. Again, LifeSource Mortgage representatives are experts in working with buyers. We’ll help find the program that best fits their needs. Further, we’ll help you determine which assets might be of most assistance when securing your loan.
LifeSource Mortgage has the expertise and experience you need, here’s what we provide:
- Exceptional Personalized Service and Care—As a small, independent, family mortgage company; we care about our clients and our reputation. Serving you is our first priority and we are available almost any day of the week.
- The Best Mortgage Rates—We have the ability to shop interest rates from several lenders and our clients are very satisfied with our rates and responsiveness. Doing so gives our clients the best rate for their mortgage.
- Increased Chance of Approval—Combining the service of our knowledgeable loan officers with our access to several lenders gives us the ability to find the lender who will offer the highest probability for your home loan approval! We work quickly to make sure you get everything you need to get into the home of your dreams.