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A Little? A Lot? Down Payments and Your House Payment

Your down payment represents the initial blood, sweat and tears that you put into your new home.  It’s one of the factors lenders review when evaluating a mortgage application along with credit, income and job history.  But how much is the ideal amount for a down payment? Don’t lenders want at least 20 percent of the sales price as a down payment?  Or is it best to keep your funds in the bank and put as little down as possible?  That really depends on the type of mortgage you’re applying for.

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Conventional mortgages using lending guidelines established by Fannie Mae and Freddie Mac ask for a down payment of at least 20 percent for a primary residence.  But they’ll take less.  A conventional mortgage will accept a down payment as low as 5 percent of the sales price, even lower under special loan programs, but down payments less than 20 percent down will require a private mortgage insurance policy, or PMI.  That means higher monthly payments.

PMI is indeed an insurance policy whose premium is paid by the borrower with benefits paid to the lender and insures the lender the approximate difference between 20 percent down and the actual down payment made by the borrower.  On a $300,000 home and a 5 percent down payment, a PMI policy will pay the lender the difference between 20 percent down and 5 percent down should the loan default.  In this example, the approximate payment to the lender is $45,000.  And the PMI premium paid by the borrower under this scenario?  About $160 extra per month added to your house payment.

Interest rates may also vary based upon the amount of down payment in relation to your credit score.  Those with excellent credit may not see any change in rate at all, but borrowers with credit scores as low as 620 and a 10 percent down payment can expect an interest rate one-half percent higher compared to those with a credit score above 740.  This can mean an additional $75 or more each month on a $260,000 loan amount.

FHA-backed mortgage loans are a bit less stringent regarding a down payment, requiring as little as 3.5 percent down.  FHA loans also have their own mortgage insurance requirement, called a Mortgage Insurance Premium, or MIP.  HUD has increased the monthly MIP premium beginning in January, 2013. Again using a $300,000 sales price, the new monthly MIP payment adds another $503.

Finally, are you one of those lucky borrowers with VA-loan eligibility?  VA-backed mortgage loans require no money down and have no additional monthly mortgage insurance premium payment.

The amount of a down payment can vary based upon the type of loan as well as the borrower’s credit.  Many borrowers have a choice of how much to put down while others are on a tighter budget, saving enough for to buy a home. Regardless, the amount of a down payment can have a profound effect on a house payment.  So save a little or save a lot; just remember your house payment awaits your decision.


David Reed is a published author and columnist with expertise in the real estate, financial, investment, consumer credit and mortgage industries with more than 20 years of hands-on experience.

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