Low Down Payment Purchase Options
For some home buyers, there is a very difficult decision to make. How much money should you use as a down payment?
The best route for each buyer or investor depends on their situation and personal preferences. There are four issues that all home buyers should consider when thinking about their down payment. They are:
- Options for your down payment
- Cost of Low Down Payments
- Benefits of having lower down payments
- Things to Consider
The information that we have provided below is to make you think about the different financing programs that are available. It is not to steer you towards a particular program, but something to consider when purchasing a home or an investment property.
Options for your Down Payment
In this section, we will review the minimum down payment needed for conforming loans, as well as some non-conventional (FHA loans) programs.
Here’s an example. You can purchase a single-family home or a condo with as little as 3.5% in down payments, but there is a price for the lower down payments on conforming loans. You will have to pay for mortgage insurance (often called PMI, private mortgage insurance).
Mortgage insurance is required when the conforming loan amount is more than 80% of the purchase price (translation: down payment is less than 20%). Keep in mind that the lower the down payment, the higher the premium ratio.
Military veterans who qualify for a VA loan can buy a home with the need for no money down at all. VA loans can provide up to 100% financing for qualified military personnel and veterans There are alo non-conforming mortgage loan programs that allows for an 80/20 set-up, which allows borrowers to obtain a second mortgage to cover the 20% down payment.
The bottom line is that regardless of your credit and income, you have a variety of options to purchase a home with no money down.
How much you’ll be paying for a lower down payment
Low or no down payment programs have two primary costs:
- High-interest rates
- High mortgage insurance premiums
The downside of a smaller down payment is that whether you are using a conforming loan or a non-conforming loan is that you will need to pay higher interest rates and mortgage insurance
Mortgage Insurance is calculated against the loan amount so you get hit with a double whammy. A lower down payment means a higher loan amount and a higher mortgage insurance rate.
Mortgage insurance can be removed once sufficient equity is produced. So if the property shows at least 20% equity in a few years, the mortgage insurance can be refinanced away.
Another burden of lower down payments is higher amounts loaned to you, which translates into higher monthly payments
Consider buying a $100,000 condo with market interest rate of 6.500%
- With a 5% down payment, the loan of $95,000 would have monthly payments of $600.46.
- However, a 10% down payment would decrease the loan amount to $90,000 and the payment would be decreased to $586.86 per month.
During the first few years of your mortgage, the majority of your monthly payments are for interest which is normally tax deductible, so you actually get some of your monthly payments back at the end of the year in the form of tax deductions
Benefits of a Lower Down Payment
Though there seem to be many disadvantages of a low down payment, there are also advantages. Carefully weigh the pros and cons and then decide what is best for you.
The main benefits of a lower down payment include:
- Increased liquidity.
- Higher rate of return. Your property’s appreciation will be the same whether you put 3%, 5%, or 20% down. In fact, your rate of return decreases as you make a larger down payment as we will discuss below
- In some cases, the smart investor can make some money by placing it in other investments.
Things To Consider
How much you want to put down is something which you should think about very carefully. You have to make your own calculations of what you can afford for the monthly payments. The lender will qualify you for a certain level based on your income, but the level for qualification is often different from what you are comfortable with.
Your mortgage lender may have approved a monthly mortgage payment of $1,500, but you may only be able to afford $1,200 per month. If that is the case, you must lower the loan amount by increasing the down payment or finding a property that is less expensive.
Consult with your loan officer about the best solution for you all the while finding a way to eliminate or minimize mortgage insurance.
Working with America’s Mortgage Lender
- We make you a priority
- America’s Mortgage Lender offers some of the most competitive rates in the nation!
- We are fast and efficient. We close most of our loans in 30 days or less.
- We offer a variety of loans and we at America’s Mortgage Lender will help you find the loan that is right for you!