What is a down payment and how does it affect your mortgage?
Let's talk down payment!
A down payment is what you, as the borrower, pay upfront in cash at the closing table. Your down payment can typically range anywhere from 3-20% of the purchase price of your home, depending on the loan product you choose to finance with. There are different down payment assistance programs available to help make home ownership achievable, but be sure to contact your Loan Originator to see what is offered in the zip code you are purchasing in.
A down payment is crucial in determining the future mortgage payments that you will be making as a borrower. It also dictates what funds you have available for the lifetime of the loan. Depending on your situation, there are both potential benefits and drawbacks for a lower or higher down payment. We have highlighted three main points for each:
A bigger down payment typically means…
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Lower interest rates
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Lower monthly payments
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Reduced mortgage insurance costs
A smaller down payment typically means…
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You can buy a home sooner
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You have more funds available for repairs and renovations
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You will have extra funds for emergencies
Determining what type of down payment you should be aiming to pay can depend on what type of home you are purchasing, how much cash on hand you want, and your budget. Be sure to discuss your scenario with a Loan Originator to see what options are best for you.
Why are LTV and PMI relevant to down payments?
LTV, also known as loan-to-value, is the percentage representing a home’s value that a lender is willing to loan a borrower for a mortgage. It is calculated by taking the loan amount needed for a home purchase, divided by the appraisal value of the home, multiplied by 100 (to make this a percentage). LTVs are used to help borrowers determine how big of a down payment is needed for them to receive a loan.
PMI*, better known as Private Mortgage Insurance, is necessary for buyers who put less than 20% down for their down payment. PMI is a monthly payment that is made until there is 20% equity in the home. Many borrowers believe that putting down 20% is the best option to avoid PMI, however this monthly cost can be relatively small. Borrowers can put as little as 3% down, or even opt for a fully financed mortgage. Be sure to discuss your options with your Loan Originator to see which scenario works best for your financial needs.
*This portion is referencing Conventional requirements; other programs requirements may differ.
*PMI is required for Conventional loans, other programs require similar types of insurance based on the loan type.