What is my down payment? Should I put more or less down?
Various types of loan programs exist that offer various combinations of down payment, interest rate, mortgage insurance, and payoff schedules.
Some loan types require a minimum of 3% down payment (FHA Loans) or 5% on conventional loans. Veterans can purchase with no money down (VA Loan). Putting down as little as possible allows you to take full advantage of the borrowing leverage and tax benefits of home ownership. Mortgage interest and property taxes are fully deducible from state and federal income taxes.
Buyers using a small down payment have a reserve for making improvements. It may be more prudent to make a larger down payment and thereby reduce the amount of debt that must be financed. The term of the loan has a tremendous impact upon the amount of principle paid on the loan each month. The difference in equity pay down between a 15 year fixed loan and a 30 year fixed loan is astonishing.
Once a buyer puts 20% or more as a down payment on their desired home, the Lender will waive the mortgage insurance requirement. Mortgage insurance is a requirement on all loans, with the exception of veterans guaranteed loans. That means a full years premium for the insurance is collected “up front’ at the closing of escrow, plus you will be paying it monthly as part of your principle-interest-taxes-insurance.
Talk to your lender about various loan scenarios and make sure you fully understand the near term and long-term implications of each approach.
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