All About Down Payments

By NationalMortgage.com

You’ve made a huge decision: You are ready to be a homeowner. Now that you are making a huge leap, you also have to consider if you have enough money for a down payment. Although, you can purchase a home without a down payment, in the end this will cost you with additional fees and interest from your private mortgage insurance – added interest to your home costs. Take it from us, you’ll want to have a down payment, here’s how much you should have.

How Much of a Down Payment?
Zero-down home loans were once very popular; however, the recent surge in foreclosures may indicate that these loans are not be all they are cracked up to be. This is mainly because borrowers had substantial monthly payments that they were unable pay, in addition their mortgage.

The good thing about putting money down is that it shows a home lender that you will likely not default because you invested your own money.

The recommendation for down payments is that you put down about 20 percent or more of the home cost (if you have that amount available). This is known as the 80 percent loan to value ratio (LTV). If you put down less than this you will be have to pay a private mortgage insurance, which protects the lender in the event you default on the loan.

Under federal law the lender is required to cancel PMI once the LTV ratio reaches 78 percent or, in other words, when your mortgage amortized to 78 percent of the original value of the house. The borrower must be current on mortgage payments and the lender must tell the borrower at closing when the mortgage hits the 78 percent level.

Some mortgage lenders may require this 20 percent to be put down in order to get a loan. You can be turned down for a loan if you are not able to come up with the 20 percent the lender requires. In some areas of the country where homes for even first-time buyers are very expensive, 20 percent can be a lot.

Making the decision on how much to put down for your home mortgage depends on many things and there is really no right answer. Some future homeowners feel comfortable with a 100 percent LTV ratio and other people are uncomfortable with an 80 percent LTV ratio – essentially you have to choose what is right for you.

But one thing is certain: if you put down 20 percent or more, you will likely avoid having to take out private mortgage insurance. If you do not have the 20 percent right away, you may wish to increase the number of mortgage payments each year to pay off the mortgage as quickly as possible, or to build up enough equity to avoid paying private mortgage insurance. Remember, the more money you put down, the less your monthly payments will be.