Down Payment

Putting together a down payment is the first financial step on the path towards homeownership and often it can be the most difficult.

A down payment is part of the purchase price of a home that a buyer pays from his own funds, as opposed to that portion of the purchase price that is financed by a home loan or mortgage. The down payment will be the difference between the purchase price and loan amount and any down payment made by the buyer will become their property equity.

Anyone who is considering putting a down payment on a house should prepare themselves years ahead of time so that they are able to make a significant down payment.

Preparing to Make a Down Payment:

- Pay off all other loans in full

- Take care of all other outstanding bills and debts

- Maintain a steady job for at least a few years before attempting to make a down payment

- Plan out a budget that will take mortgage payments into consideration

- Avoid making large purchases

- Save as much money as possible

Saving money is the key to purchasing a home. The more cash a person is able to collect for a down payment the less they will ultimately pay towards the purchase of that home and the more equity they will have right from the start.

Large down payments instantly take a large chunk out of the principle of a home loan or mortgage, which in the long run will reduce interest payments and make the length of time over which the mortgage is paid off shorter. Basically the larger your down payment is better off you will be in the long run because you will end up paying less and owning more.

Most banks and financial institutions will ask for 20% of the home’s purchase price as a down payment, but in certain situations as little as 3% can be given as a down payment. Plans that involve a down payment of less than 20% are aptly called “low down payment mortgages” and for many people this sort of plan is the only reason homeownership is a remote possibility.

Low down payments don’t come without a hitch though. In order to qualify for a low down payment mortgage homeowners must obtain mortgage insurance.

Mortgage insurance (MI) is a contract purchased by borrowers that offers security for their lenders. So if for some reason a borrower defaults and is unable to make mortgage payments, the lender will not take a loss.

The borrower pays for mortgage insurance, but this insurance directly benefits the lender. So if a homeowner has mortgage insurance and fails to make mortgage payments their home will go into foreclosure and both the homeowner and their insurer will take a loss. In this case the homeowner loses their home and any money that they have put into it and the mortgage insurer takes a loss because they will have to pay the lender’s claim on the defaulted loan.

With most mortgage insurance the borrower will buy the insurance plan and an initial premium will be collected at closing, which occurs when the sale of the home is finalized. A monthly insurance payment may then be included in the borrowers house payments; depending on which premium plan the borrower qualifies for.

Usually mortgage insurance is paid off either annually, monthly or all at once with one single large payment.

There are many companies and agencies that offer mortgage insurance plans.

Mortgage Insurance Options:

- The Veterans Administration (VA) program for veterans and reservists

- The USDA Rural Housing Service program for the construction and purchase of homes in rural areas

- Federal Housing Administration (FHA) plans

- Private Mortgage Insurance (PMI) plans

Some of the more popular plans are the Federal Housing Administration mortgage insurance plans and private mortgage insurance plans.

Mortgage insurance issued by the Federal Housing Administration usually requires a payment of 1.5 percent of the mortgage amount to be paid at closing. An annual fee of 0.5 percent of the mortgage amount is then added to each monthly payment that the borrower makes on his house. Virtually anyone with a good credit record and sufficient steady income can be approved for an FHA-insured mortgage.

For homeowners who purchase private mortgage insurance the amount that needs to be paid to the insurer will differ depending on the down payment that was put down and the loan that the homeowner is carrying. Payments for private mortgage insurance are typically about 0.5 percent of the mortgage amount and these payments are normally made either annually or monthly.

Anyone who takes on mortgage insurance because of an inability to make a sizable down payment should remember they are doing so to protect their lender not themselves. For this reason it is imperative to try and get rid of mortgage insurance payments as soon as possible by paying off as much as possible, as quickly as possible.

Private mortgage insurance usually only requires the borrower to make payments on their insurance until they have paid back 80 percent of the principle of their mortgage. Many lenders will give their borrowers an idea of how long it will take to pay back 80 percent so that borrowers can cancel their insurance.

With houses becoming more and more expensive mortgage insurance has become an increasingly popular alternative to huge 20% down payments. Considering that most homes these days cost upwards of $200,000, many people, especially first time homebuyers, find that attempting to gather up the necessary down payment is unrealistic. The standard down payment on a $200,000 home is $40,000 and most of the population does not have access to that amount of money, especially in cash.

Though mortgage insurance is an attractive option when it comes to homeownership some people still prefer not to have additional contracts hanging over their heads they make the big purchase. People who cannot make large down payments, but turn down or are unqualified for mortgage insurance are sometimes offered an alternative by their lenders. The alternative for people who have good credit is to accept a higher interest rate on their mortgage. The amount that the interest rate will increase will differ between lenders, but typically it will depend on the size of the down payment made.

Many people rush into homeownership when they feel that they have found the perfect place to live without taking finances into consideration and this can be a huge mistake.

If a homebuyer hasn’t been planning years in advance for homeownership they will ultimately be making payments to lenders and insurers for an extended amount of time.

Not only will a substantial down payment make it easier to obtain a mortgage with reasonable rates, but it will also result in more instant equity.

Ultimately the amount a person will pay in the long run for a home all comes down to the down payment.

Homebuyers who save up and put down will always have the best mortgages in town.

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