How much to put down on a home

It’s not always easy to save up enough to make the traditional 20 percent down payment on a home. Fortunately, lenders today offer many low-down-payment mortgages. But when deciding how much to put down, you should consider the following:

Is 20 percent the standard down payment?
In order to qualify for a conventional mortgage, lenders usually require a minimum down payment of 20 percent. If you put down less than 20 percent, most lenders will require you buy Private Mortgage Insurance (PMI). This insurance typically costs about one-half of 1 percent of the purchase price of the home and protects the lender in the event that you should default on the loan. Your overall mortgage costs will therefore be less if you come up with 20 percent down and can avoid having to pay PMI.

What if I put down less than 20 percent?
If you can’t afford a 20 percent down payment, paying PMI may be your best option. And once you reach 22 percent equity in your home (or sometimes 20 percent equity with a good payment history), you can get your lender to cancel the insurance. An alternative is to apply for an 80/10/10 loan. It enables you to avoid PMI by financing half of the required 20 percent down payment with a second mortgage. The way it works is that 80 percent of the purchase price of a home is financed through a first mortgage, 10 percent through a second mortgage, with the final 10 percent coming from the down payment. Or you can apply for a government-insured FHA loan. Again, you will have to pay for insurance, but you may qualify with a down payment as little as 3 percent.

What about putting down no money at all?
It is possible to finance 100 percent of the purchase price of a home with a mortgage that requires no down payment at all. The disadvantage of this type of financing is that you are likely to be charged a higher interest rate than that of a standard mortgage. This means your monthly mortgage payment will be higher. Also, because you didn’t make the standard 20 percent down payment, you will have to pay PMI.

Let’s review the options
When deciding how much to put down on a home, it’s important to know what your options are so you can decide what works best for you.

  • Q: Would you prefer getting instant equity in your home and lowering your monthly mortgage payment?
    A: Then putting down 20 percent may be best for you.
  • Q: Are you unable to come up with a 20 percent down payment but want to avoid paying PMI?
    A: Then you may want to consider an 80/10/10.
  • Q: Can you only come up with a 3 percent or 5 percent down payment and don’t want to wait to buy a home because you are concerned about rising house prices?
    A: Maybe a government-insured FHA loan would be a good answer.
  • Q: Do you have no savings at all but are so eager to enter the real estate market immediately that you are willing to pay the extra costs involved in a no-money-down mortgage?
    A: Provided you are able to handle the required payments and are confident your financial situation will enable you to refinance for a mortgage with better terms in the future, it could be the way to go.

The important this is to evaluate your own situation carefully before you decide how much to put down on a home.

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