The down payment is one of the most important elements of the homebuying process. Your down payment could affect your finances for years to come. In this article, we’re going to breakdown the short-and long-term impacts of your down payment and some options to move forward if your financial position isn’t strong enough to make a substantial down payment.
What is a Down Payment?
A down payment is simply the money that you use to purchase a home.
This amount will determine the remaining cost of your mortgage, whether private mortgage insurance (PMI) is attached to the loan and sometimes even alter the interest rate.
The biggest effect of your down payment will be on your monthly mortgage payments.
Imagine, for example, that the home you want to purchase has a final price of $350,000 with an interest rate of 3.7% and a traditional 30-year fixed mortgage. If you provide $70,000 (20%) for your down payment, your monthly payment will be $1,758 per month. However, if you decide to use $35,000 (10%) for your down payment, your monthly mortgage amount will be somewhere in the area of $2,000 dollars.
How will Private Mortgage Insurance (PMI) Affect My Down Payment?
In addition to affecting your monthly payments, a large down payment will determine if you need private mortgage insurance (PMI). PMI is attached to mortgages with a down payment amount of less than 20% and typically costs between 0.5% to 1% of the entire mortgage amount on a yearly basis.
For example, on a home with a price of $350,000, PMI will cost anywhere between $1,750 to $3,000 a year. This yearly total is then divided into a monthly amount and added to your mortgage payments.
Solutions for a Down Payment Less Than 20%
If you have a down payment of less than 20%, you have several options available to help you avoid paying PMI or to shorten the time that you pay it for.
Wait Until You’ve Saved Enough
One option is to wait until you have a 20% down payment saved or a down payment amount you are comfortable with. By waiting and saving up money for a larger down payment, you are not only shortening the amount you’ll pay over the life of the loan, but you are also reducing your monthly payments.
Saving money might mean taking a look at your monthly budget and expenditures, seeing what purchase you can cut down and redirecting that money towards down payment savings.
Decide on A Home with A Lower Sticker Price
When the home price is smaller, the amount you need to avoid PMI is also smaller. This drop in price could also decrease your need for a larger down payment.
If you’re willing to open up your options, you may find another home that’s perfect for you, your budget and your lifestyle.
Use A Special Loan Program
There are loan programs for buyers who have less cash to close. One such program is the FHA loan, a program that helps buyers with lower credit scores and smaller cash amounts close on their dream home. This is a loan that is backed by the Federal Housing Administration and allows eligible buyers to put 3.5% of the home purchase price for their down payment.
Another option is the VA loan. The VA loan, administered by the Veterans Association, provides military service members and their families a path to secure a home. This loan doesn’t require any money down and it eliminates PMI. Your mortgage loan originator can help determine the best loan for you and your budget.
Enlist the Help of Family And/Or Friends
Using gifts to help with a down payment is very common and can close the gap between what you currently have and your desired amount.
When you meet with your Homebridge Mortgage Loan Originator, you can ask them about gifts and gifting eligibility towards your down payment.
Refinance Down the Road
Many homeowners decide to buy a home and refinance later on in their homeownership journey. Some reasons include:
- Lowering their interest rate
- Refinancing to eliminate PMI from their home loan
- Deciding to renovate their home
If you decide to buy now and want a lower home mortgage in the future, refinancing is an available option.
The down payment is one of the most important parts of homebuying, so it helps to think about it proactively. Even if you don’t have the traditional 20% down payment, there are many loan programs that can help you secure a loan to purchase the home of your dreams.
To find the home loan that’s right for you – view our list of available loan programs.