3 Tips on Building a Solid Down Payment2/04/2011 One of the largest hurdles to overcome when preparing for a home purchase is securing your down payment. It can be difficult to come up with a big sum of money all at once. If you’re a first time home buyer and you don’t have any previous equity to apply to your mortgage, you may feel you’re in a tight spot. The following three down payment tips will help you make the best financial decisions. 1. Your down payment needs to developed over time. It can’t be something you pull together at the last minute. This looks sketchy to lenders. You must “seasoned” over time. You can do this either by keeping the funds in a bank account for several months or by verifying the source of the funds, such as equity drawn from other investments you own. 2. Make it big. The bigger your down payment, the better off you’ll be both in the long run and the short run. First of all, a large down payment will get you access to the lowest mortgage rates your lender is willing to offer. Lenders don’t offer low rates to high risk borrowers, and if you’re only putting down a small amount of money up front, you’re high risk. Second, the interest your lender charges will be applied to a lower principal balance, which will save you money over time. You’ll also be able to pay the loan off faster, all things considered, which will save you even more money. One of the most well known benefits for making a large down payment is mortgage insurance. If your down payment is less than 20% of the total purchase price of the home, you’ll have to pay an additional fee each month for private mortgage insurance. You don’t want this. Make your down payment as large as possible. 3. Start saving early. As mentioned above, you need to put your down payment together over time, not all at once. But even this doesn’t go far enough. Ideally, you should start saving for your down payment years before you plan to purchase. This allows you to save more money and save it more effectively. Make a habit out of it. If you’re able to follow these three tips from the beginning of the process, you’ll be in good shape. |
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