The Significance of the Mortgage Down Payment
Consumers who are planning to purchase a home have most likely been saving for a number of years leading up to the actual time when they are ready to make a move. Homeownership is a commitment that does require the need to be prepared for the benefits, as well as, the issues that may come along. At the onset of this venture, the significance of the mortgage down payment will show in the final mortgage numbers.
The mortgage down payment is the upfront portion of funds that represents a percentage of the total cost of the home. Different mortgage products have specific guidelines as to how much of a down payment is required. Therefore, the amount of the down payment will directly affect the type of mortgage that is available to the borrower, the amount of the loan, the mortgage interest rate and the term of the loan.
Conventional loans are the most popular mortgages available today for a home purchase. The minimum down payment required with a conventional loan is 5%. If this minimum of 5% is used by a borrower and accepted by the lender, private mortgage insurance (PMI) is required and protects the lender in the case of non-payment and default of the loan. Any down payment below 20% of the home’s value will require private mortgage insurance.
A down payment of 20% is determined to be a level at which a lender’s risk is minimized. With a 20% down payment, the borrower has gained a 20% share of equity in the home and is less likely to default on the loan. It is a significant amount of money that the borrower has acquired, usually through budgeting and saving, which shows the lender that there is a definite financial interest in the home purchase.
Since a 20% down payment is considered less of a risk, lenders will often offer a better mortgage rate which will ultimately reduce the costs of interest paid over the term of the loan. The higher down payment also means that less money needs to be financed through the mortgage. A lower mortgage rate and smaller mortgage equals a lower monthly mortgage payment. In addition, due to this reduced risk, private mortgage insurance is not required.
With a smaller down payment, the opposite occurs. The lender will take into consideration the amount of the down payment and the amount of risk that it presents. What the lender determines to be an acceptable down payment will be based on the overall mortgage file, including the credit score and credit history. The interest rate, which is determined by several factors, will also take into consideration the smaller down payment. These factors are established by the lender’s rate sheets. Since the rate will be higher, the amount of money borrowed will be higher and private mortgage insurance will need to be paid, the monthly mortgage payment will also be higher.
The amount of down payment that is made by a borrower might be determined for several reasons. Some may choose a smaller down payment in order to purchase quickly at a specific time due to rising home prices. For some, it may just take too long to save for a 20% down payment. The final outcome will be a personal decision on whether to save or the desire to purchase a home at the moment.
