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How Much Money Should You Put Down When Buying a Home?  A Guide to Down Payments

12/01/2010

You’ve decided to move forward with a home purchase, and you’ve found a lender who can provide you with a mortgage.  Great.  But you need to bring some cash to the table at closing in the form of a down payment.  How much money do you need to put down for this?

If you’re a first time home buyer, you may have difficulty coming up with the funds to make your down payment, as you won’t have any previous home equity to draw upon.  The question of how much money is necessary for the down payment is one of crucial importance to buyers in this position.  The following five tips will help you determine how large your down payment should be.

1.    Pay as much as you can.  In general, the more money you put down up front, the smaller your loan amount will be and the less you’ll pay out in interest later.  The larger your down payment is, the more money you save.  But don’t take this to an extreme.  You’ll still have to pay other closing costs, moving expenses, and you’ll need to purchase food and essentials.

2.    Pay as much as it takes to get the loan you need.  The larger your down payment is, the better your loan terms will be.  For example, the lowest mortgage rates are typically offered to borrowers who can provide the largest down payments.  You’ll qualify for better loan terms and additional mortgage package options.

3.    Pay enough to make up for your credit history.  This won’t apply to some borrowers, but if you have a poor credit score, you may need to make a higher down payment in order to qualify for a mortgage in the first place.  Keep this in mind.

4.    Pay at least 20% of the total home price.  With conventional mortgages, if your down payment doesn’t equal at least 20% of the total home purchase price, you’ll have to pay for private mortgage insurance, which will cause your monthly mortgage payments to increase.

If you don’t have much cash on hand and you’re unable to make a large down payment, consider other options available to you before settling for worse mortgage terms.

1.    Take out an FHA mortgage or a VA home loan.  With an FHA mortgage, you’ll still have to pay private mortgage insurance, but FHA mortgages only require a 3.5% down payment and often allow borrowers to take out loans with better interest rates than conventional mortgages.  VA home loans allow veterans to take out loans with no down payment requirement, no private mortgage insurance requirement, and solid interest rates.  Look into this if it’s an option that’s available to you.

2.    Take out a second mortgage to cover the down payment.  This isn’t always a wise idea, but if you do the right research and find the best loan options, you might be able to score a deal.  The process simply involves taking out an additional loan, from either the same lender or a different one, to cover the 20% down payment.

3.    Wait and save up money.  Depending on the home prices of your area, it may take a while to save up enough money to put 20% down on a home, but if you can manage it, you’ll save significant money in the long run and you won’t have to worry about the hassle of two separate mortgage payments.

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