Jim Jonz, Member
20% is the magic number that saves you from paying any mortgage insurance premiums. A 30% down is likely a guaranteed approval. This is the standard amount for second homes and investor purchases. The less you finance the more likely you'll keep it. Paying no PMI for example: If you buy a home for 150K and put 10% down, you'll pay an insurance premium of about 2K and about $100 per month extra for about 10 years. If you put 20% down there's no 2K at the start and no $100 MIP per month. The extra 13K down (considering you'd pay a 2K insurance premium any way) saves you at least 15K in payments.
Ross Garner, WalletHub Community Manager
Deciding how much to put down on your house can be very difficult; it's such a big decision and costs so much money that it's often hard to decide just what to do. For the most part though, you should just put down as much money as you can realistically afford. There are a number of good reasons, but what they all boil down to is that the more you put down, the less your loan will cost you over the long term. If you're also wondering what the minimum down payment requirements are for most loans, they can be difficult to find since each lender sets their own down payment requirements. However, later I'll cover how much you'd have to put down on the most popular government loan programs that are available to most borrowers.
The most direct way a larger down payment can help you is by saving you money on mortgage interest. This can happen in two different ways:
- Lower you mortgage balance By lowering the starting balance on your home, you will end up paying less interest over time. This is obvious, but needs to be pointed out since it can save you significant amounts of money.
- Lower interest rates if you are willing to place a larger than average down payment, your lender might be willing to give you a better interest rate; on the other hand, if you don't put much or anything down, you can expect a higher than average interest rate.
- A higher down payment will also let you get out of mortgage insurance faster. Your lender is required to allow you to cancel your mortgage insurance policy once you reach 20% ownership of your home. The closer you start, the faster you'll be able to get there and get rid of a payment that extra payment that usually costs you 1%-2% of your remaining mortgage amount each and every year.
Each organization has different requirements for a borrower, but we will list the down payments required for their most common loans:
- FHA these loans have become very popular in recent times because you can get one relatively easily with only 3.5% down. That's low by almost any standard. The low down payment will cost you though: mortgage insurance on an FHA loan is usually more expensive, with a higher upfront cost and a more expensive yearly premium.
- Freddie Mac or Fannie Mae the typical loan from these organizations requires about 10% down. Both also offer loans at 0% down, but these loans have other requirements that could be harder to meet.
- Veteran Affairs (VA) if you qualify for a VA loan, you can usually get one with no down payment and no mortgage insurance. Not having to pay insurance on your loan could save you thousands of dollars over the course of the loan. If you're eligible this is likely your best option.
- USDA You can often get a USDA loan with 0% down and a good interest rate, but you have to be located in targeted rural areas to qualify. If you think you might be in one, you can find out if your area is eligible at the USDA's website.
M. DeRizz, Member
When considering how much to put as a down payment on a house, you need to consider several factors. Most mortgage companies prefer 20% down, but there are other options and many points to contemplate. First, how much do you have in savings? Not only will you need money for a down payment, but closing costs can run upwards of $5,000 or more and do not got towards the down payment.
Also, what are the current interest rates? The general rule is, the lower the rate and the higher the down payment, the more house you can afford. Furthermore, current interest rates need to be taken into account. Do you want a fixed rate mortgage or an adjustable rate mortgage? Currently in 2014, mortgage rates are historically very low, so a fixed rate mortgage is probably the best option. Having an adjustable rate mortgage could backfire on you if interest rates rise considerably.
Another factor to think about is whether you want a 15 year or 30 year mortgage. If you choose the 15 year option, depending on current interest rates, your monthly payment will be higher but you will be able to pay off your house in half the time. This is something to think about if you have young children and plan on sending them to college. If the fifteen year mortgage is not an option, consider making an extra monthly payment per annum, spread out over the year. For example, if you have a $1200 monthly mortgage payment, add $100 to the payment every month and you will shave a few years off of your mortgage.
Additionally, how much can you afford as a monthly payment? Looking at your cash flow, and considering other monthly expenses, like cars, taxes, insurance, heating, and electricity - how much can you afford? It is always wise to make sure that you have a "cushion", i.e. money in your savings account for life's little emergencies, whether it's a broken water heater or upgrading your furnace. It's a good idea to have at least $10,000 in reserve. It seems like a lot to think about, but if you plan carefully right now, you will enjoy the benefits of home ownership well into the future.
Jason T Hull, Financial Advisor
I'll throw a different approach at you just to give you something else to think about. How about renting for a few years longer and saving like crazy and paying cash for your house instead? I don't fuss at clients who have mortgages or who buy houses with a mortgage, but if you're patient, focused, and aggressive, you could have a house free and clear.
Remember this, though, buying a house, especially one with a mortgage, reduces your choices and flexibility down the road. You have fewer of what are called real options. There's a great movie called "I'm Fine, Thanks" which is a documentary of a whole bunch of average Americans. Watch those interviews and see how many of them are struck by housing problems. It's eye-opening.
If you can get the house at a deep discount to the market, then I'd be OK with that. To me, the math is nearly a wash except for capital appreciation. A lot of people count of capital appreciation as if it's as sure as a rising sun, which it's not. That's why the buy has to be in a distressed seller situation - so that you're taking advantage of an informational inefficiency in the real estate market to capture value on the purchase. Otherwise, I'm still going to say to rent for a few years while you aggressively find other ways to build up that down payment. Here are a few reasons why: 1) The mortgage deduction isn't available if you take a standard deduction, and then, the interest deduction is only equivalent to however much it bumps you above the standard deduction. Only 37.1% of homeowners take the mortgage deduction on their taxes, and certainly less than 100% of them get the full value of it. 2) You can negotiate to lower the rent if you're creative. I've had renters who were great gardeners and landscapers, and I happily lowered the rent for them because they were increasing the value of my property. Same for home repairs; if they were handy and would provide the labor while I provided the materials, I'd give them a rent deduction usually in excess of what it would cost a handyman to go do it. Maybe I'm a sucker? 3) In a 30 year mortgage, the first five years barely makes a dent in your principal balance; hence, the statement about being able to buy a great deal. In good economies, the average homeowner stays in his home for six years. In the recent recession, it's increased to 9 years. With a 4% mortgage over 30 years, you knock out 11.7% of the principal in 6 years and 18.7% of the principal in 9 years. If you have to sell in that time, commissions and round trip closing costs (on the purchase and the sale) will nearly knock out the benefit of equity appreciation that you have. If you are renting, you don't face those costs. 4) You avoid mortgage origination fees. Granted, these aren't huge, but they're there. 5) If you find yourself in financial trouble, it's much easier to break a rent and find a cheaper place to live than it is to get out from a mortgage. Most leases have a 1 or 2 month break fee, and you've probably paid it already (in your deposit). Pay that and you're scot free to find yourself a different place. In a lot of circumstances, you won't get away from a house with a mortgage that easily. Having a mortgage forces you to have a negotiating bottom line in a sale, or, alternatively, to look at short sales or foreclosures. 6) Relevant to #5, you can't do seller financing if you have a mortgage. If you need to get out of your house, you can't legally do a wrap in almost all mortgage-backed situations because the mortgage can be called if the property is sold, even in a seller-financed situation. Being able to offer seller financing, while not the most desirable of situations, can open you up to more buyers than traditional financing. I've found this to be particularly critical in condominium complexes where there are too many investors (or the developer hasn't sold enough homes) and FHA financing is not available. It's a marginal call, but I'm still going to come down on the side of risk aversion. There are other, better places in your life where you can utilize risk-reward, in my opinion, such as starting up a side gig, than your personal housing. Yes, the math is usually in favor of leverage, but, if you wind up on the wrong side that leverage, the cost is usually very steep.
What if the mortgage payment is as much as the rent payment and you are buying a relatively new house (which minimizes maintenance costs in the next few years)??
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