When people are thinking of buying a home the most attractive option is to fork over the least amount as a down payment. Most people want to have cash available to furnish their new home and as a base for any unexpected expenses that might arise after purchase.
Some buyers won’t have these options because they only have enough money for the down payment and associated closing costs. For the fortunate buyers that do have the extra money let’s look at why you would want to make a larger down payment.
It is a lending standard that loans in excess of 80 percent loan-to-value will require mortgage insurance to protect the lender if the loan were to go into foreclosure. For loan applications made after June 3, 2013, and with less than a 10 percent down payment, FHA requires an up-front premium of 1.75 percent of the amount borrowed plus a monthly amount of .85 percent on the balance. In this situation, the FHA mortgage insurance premium will need to be paid for the life of the loan.
Private mortgage insurance on conventional loans will depend on your credit and the size of the down payment you are making. Unlike FHA, when your unpaid balance reaches 78 percent of the original amount borrowed, private mortgage insurance is no longer needed. The good news is that if your home has a rapid appreciation, you can get another appraisal to show the lender that your unpaid balance is now less than the 78 percent of the appraised value.
The premium for mortgage insurance on conventional loans can be paid as a single premium upfront in cash or financed into the mortgage. A second option would be monthly mortgage insurance included in the payment until it is no longer needed. A third option could be lender-paid MI where the cost is included in the mortgage interest rate for the life of the loan.
VA loans do not require mortgage insurance but instead, there is a one-time funding fee of 2.3 percent that can be paid in cash at closing or added to the amount borrowed. This funding fee is not required to be paid by Disabled veterans and Purple Heart recipients.
Altogether, making a down payment of at least 20 percent on a home will help you avoid needing mortgage insurance and that could help you get a bit lower interest rate. Decreasing loan-to-value also decreases the risk for the lender.
A $350,000 mortgage loan with a 10 percent down payment at a 4 percent interest rate could have a monthly mortgage insurance cost between $70 to $130. A trusted mortgage professional can help you assess the options you have available. It is always better to make some of these decisions before you start shopping for a home.
This is another reason it is good to start by getting pre-approved with a trusted mortgage professional. If you need a recommendation, call me at (703) 303-4010.
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