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2013-04-02 09:58:26
Big Down Payments
The Low-Down On Big Down Payments

You can buy a home with as little as 3 percent down, thanks to federal government loans and others with eased restrictions.


Low-down payment mortgages are an effort to extend home ownership to more people and to help some out of mortgages they can’t afford.

However, low-down payment loans can be tricky and leave homeowners struggling to pay what they thought was affordable financing.

It’s a much better option to bite the bullet, spend some time really preparing to buy a home with 20 percent down.

Here’s why.

  • Up-front equity. A substantial down payment gives you an instant equityadvantage.

    Most homeowners invest in a home largely because they want to have equity in a stable investment so, the more that you can put down, the better.

    You’ll be able to better weather any downturns in the market and you’ll likely avoid going 'underwater' (owing more than your home is worth) on your investment.

    That gives you some financial security.

  • Better rates. Generally, more money down means you’ll be able to secure a better interest rate. With 20 percent or more down, you’re a better risk to your lender because you’ve already proven a degree of financial responsibility with the respectable down payment amount. You’ll also lower your monthly payment by paying more up front.
  • Seller attraction. Sellers like buyers who can offer a certain amount up front. It shows that you can deliver on the sale – and it also gives you leverage in case of a bidding war. In short, the seller will take your offer more seriously.
  • No mortgage insurance. You won’t have to pay mortgage insurance if you put 20 percent or more down, because lenders consider your loan less risky than a loan with 20 percent down.

    Once you get mortgage insurance you’ll have to pay for it until you’ve paid down the mortgage until it is 80 percent of the value of your home. Some Federal Housing Administration loans will never let you remove mortgage insurance.

    Without mortgage insurance you’ll save an amount equal to about 0.5 percent of your loan balance each year.

  • The fast track. With 20 percent to put down, you’ll be able to pay off your mortgage sooner, especially if you take advantage of refinancingoptions in the future.

    The current housing recovery is underway and that brings the possibility that home prices will rise enough so that you can move up to a larger home or refinance to a shorter-term loan.

    It’s not possible for every home buyer to put 20 percent down. Don’t be discouraged is you can’t. Just understand the risks associated with the extra costs and more financial risk associated with a low-down loan.

    If, however, you believe you can join the 20 percent-down crowd, go for it. It’s better to wait for a mortgage you can afford, than to over leverage yourself into a mortgage that will cause a struggle.

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