Your home search has started, but you are uncertain how much of a down payment you will need. The answer to the question of how much your down payment should be lies in your wallet and your emotions, and there is no pat answer to the question of what a basic down payment will be.
Most home buyers today get pre-qualified for a loan, based on how much of a down payment they are willing and able to make, how much they earn, and their credit history. Then the lender will factor this together to come up with an annual percentage rate, and the projected payments.
The traditional rule of thumb is for a buyer to put twenty percent down, because at that level the mortgagee (buyer) will not have to purchase mortgage insurance. This type of mortgage generally matures in either 15 or 30 years, and some lenders have the options of 20 and 25 year amortization periods.
In essence, take whatever amount of cash you have available for the down payment, and multiply by five, that will get you the approximate price of the homes you should be looking to purchase. With a 20% down payment, you should be able to get a traditional, fixed-rate mortgage without the added expense of mortgage insurance, points, or origination fees.
If you are adverse to risk, the traditional mortgage, paid back in as short of a period as you can afford, is the way to go.
However, let us say you are willing to take a bigger risk, and do not mind the cost of the mortgage insurance, or you want more house than your current cash says you can purchase. Then you will be looking at one of the other types of mortgage available, from adjustable rate mortgages, to insured mortgages, to possibly ‘borrowing’ the funds from the seller in a contract for deed. These plans vary from lender to lender, and it pays to shop for the best deal.
In some of the scenarios described above, you will need as little as no down payment up to five percent down. It is likely with these types of mortgage loans that you will have to fund some form of lending costs, such as points or an origination fee, payable to the lender at the time the loan is closed, or by making even higher monthly payments. Those fees can be a flat rate, or a percentage of the amount borrowed.
The non-traditional mortgages all have one thing in common, they are risky both to the lender and the borrower.
The lender adjusts for this added risk by creating higher effective interest rates. Even if the initial rate allows the borrower to qualify for the loan, the formula being used by the lender to adjust the rates over time will end up being higher than that of a traditional mortgage. This adjustment in the rate also makes the loan riskier for the borrower, because unless the increases in their income are keeping up with the increased mortgage payments, they are looking at losing the home in the not-too-distant future.
Overall, it makes the most sense to put down as much up front as you can. The savings over time are high, and will end up being many times more than what you put down.
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