Your Mortgage Down Payment

Does Size Matter?

November 17, 2014

It wasn’t long ago that a homebuyer could finance 100% of their new home purchase. In fact, I can still remember cases where the financed amount exceeded 100%, and buyers were able to fund a new home and seven-day vacation in the process.

Those days may be gone, but determining the best down payment remains one of the primary concerns of new homebuyers. Though many aggressive down payment loan programs have fortunately been laid to rest, there are still opportunities for many buyers to purchase a home with little money down. But would you want to? Let’s discuss some of the trade-offs involved with down payments.

To begin, let’s state the obvious: The more cash you have, the better position you are in. If you have the money for a 20% or more down payment, use it. Why? Because in almost every case, your monthly mortgage payment will be lower due to more favorable terms that are awarded to you for putting 20% or more as a down payment.

Now let’s assume that you do not have 20% available. At this point, you actually have several options depending on loan size and occupancy of the property (primary, vacation, or investment home). In some cases, you can put as little down as 3% and in others, you will be required to put no less than 10% down. Furthermore, in an effort to avoid private mortgage insurance (PMI), which is required with less than 20% down, you can consider a 1st & 2nd mortgage (or home equity line of credit), or an option where the lender pays your PMI. (In such a case, your interest rate will be higher). Of course, there is always the option that you, the buyer, pay the monthly PMI yourself. Do not look at this as a poor choice, for it often turns out to be your best path.

Believe it or not, your income is also an important factor in your down payment. This is because a primary qualifier for your mortgage loan approval will be the ratio between your debt and income (DTI). A higher down payment will reduce that DTI because it reduces the monthly payment. Therefore, those with a lower income (relative to the home purchase price) may consider placing a higher down payment (if possible) in an effort to reduce their monthly payment, and, ultimately, their DTI.

In conclusion, there is no “magic formula” for choosing the right down payment. In some cases, more is better; and in others, less is the right choice. The key is being educated on what your options are and how different scenarios can affect your financial and emotional well-being. Therefore, it is imperative that you have a qualified mortgage loan officer at your side who can help you navigate through the complex web of the mortgage process. This is the surest way to choose the down payment that best fits your needs.

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Victor | 08.29.15 @ 04:07
Is great to have answer to home owning questions even if not in the market for one now it could be useful later
Alec | 08.29.15 @ 04:53
This is really interesting! My Lovie and I are going to look in to buying a home within the next few months. He was in the military so he may qualify for the VA loan mentioned in the video. We will definitely be sitting down with a professional to figure out details first. Thanks for the tips!
Elaine | 08.29.15 @ 05:10
I really enjoyed the video. It had a lot of valuable information about mortgages.
Nancy | 08.29.15 @ 05:58
There are so many variables to consider. I can see why having a qualified loan officer would be necessary.
Debbie | 08.29.15 @ 06:09
The video has a lot of good information. We bought our home a few years back and we stuck to what we could afford though the realtor repeatedly tried to get us interested in houses we could not comfortably afford long term. We wanted to be sure we could afford our payment if one of us was out of work for any reason and its a good thing too. My fiance was laid off just 2 years after buying and was unemployed three full years. We made the down payment large enough to keep the monthly payment affordable.
Angie | 08.29.15 @ 10:22
I'm happy to be able to share this with my oldest child - she's been considering whether she should continue renting or buying a home. Information like this will be most helpful.
Irene | 08.29.15 @ 10:28
Very informative, We are not currently looking to buy a home but in the past when we were pre-approved for a mortgage it was for much higher than we could have ever afforded to pay back. This was before the recession when it seemed common practice.
Steffanie | 08.29.15 @ 11:14
Great information and very useful as we have a family member starting the process of looking for their first home.
Jackie | 08.29.15 @ 12:04
This video gives great information about the home buying process. I will definitely be contacting a mortgage loan officer when purchasing my next home.
Jackie | 08.29.15 @ 12:05
This is great information to have when considering purchasing a home. I'll definitely contact a mortgage loan officer before purchasing my next home.
Erin | 08.29.15 @ 12:08
I'm glad there are professionals out there to help sort out all of the confusing aspects of buying a home. Great information, thanks!
Rychana Vingia | 08.29.15 @ 12:10
I didn't know you would need PMI if you put less than 20% down. That will make me want to save more to have a better down payment.
Daniel Dohlstrom | 08.29.15 @ 12:51
Finding your home it is location , location, location, finding your loan is research research research . Depend on the pros to help you decide anything you are unsure of.
Sara | 08.29.15 @ 13:02
With working on getting a different home this is valuable information.
Casey | 08.29.15 @ 13:02
I wish I had seen this video before purchasing my home a few years ago
Christina | 08.29.15 @ 13:55
This is great information. We were looking into finding a new home.
Britt | 08.29.15 @ 14:02
There really are so many things to consider when it comes to down payments, this video had a lot of great info.
trish | 08.29.15 @ 14:06
Great information. Wishing we had this information when we purchased our house during the time when banks were pre-approving for more than anyone could actually afford...
Andrea | 08.29.15 @ 14:09
Good read/video.
Leah Gardner | 08.29.15 @ 14:31
This is helpful. Especially since i am planning on house hunting next year
Ron | 08.29.15 @ 14:44
I am always a fan of paying off anything as fast as possible. Big downpayments and pay on top of the minimum toward principal every month.
Crystal | 08.29.15 @ 14:59
I think the down payment shows the lender the buyer will have an interest in the house also
Kamie | 08.29.15 @ 15:02
I wish I had this stuff before I had bought a lemon house a few years ago.
Wanda Langley | 08.29.15 @ 16:39
Great video and information for someone getting ready to buy a home.
Beverly | 08.29.15 @ 16:43
I used to work in the escrow business 20 years ago and some of the loans that I saw always amazed me. People were more concerned about getting in a house than if they could afford it. This article and video has some good information, but the best advice anyone can give is plan a budget and find out what you can afford to pay before you find out that you can't.
Vaughn | 08.29.15 @ 17:37
Great article!
gracie | 08.29.15 @ 17:44
A lot of great info here for those considering buying a home and the video was a nice addition!
gracie | 08.29.15 @ 17:44
A lot of great info here for those considering buying a home and the video was a nice addition!
Chelsey | 08.29.15 @ 18:02
I have been looking into various loans for building a house. Have any advice for that?
Apryl | 08.29.15 @ 19:12
Hate that I'm stuck with a PMI.
Heather | 08.29.15 @ 20:10
At lot of good information here. It's also very important to have a loan specialist you can trust and won't try to put you in a loan you cannot afford.
Christina | 08.29.15 @ 20:14
Great advice! There are so many options.
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