The recent cratering of the real estate market both in the residential and the commercial spheres has dramatically altered how buyers will approach mortgages and home loans at present and for the foreseeable future. The game has changed and the days of no-money-down mortgages, or “NINJA” mortgages, are long gone. Determining how much to put down on a house is more important than ever, as is almost every other aspect of mortgage financing at the moment. With a shaky economy, new home buyers should prepare themselves for the possibility that real estate prices may fall again in the future.
Making wise decisions and doing your homework before taking the plunge can mean the difference between a halfway pleasant mortgage experience and a nightmare. Many first time home buyers are often left asking themselves the following important question: How much should I put down on a house?
Obviously, the minimum required down payment will vary depending on your circumstances, such as credit and employment history, income, and where you plan on buying, as well the type of mortgage you want and loan you end up taking out.
FHA Loans Require Only a Small Down Payment, but that Doesn’t Mean You Can Afford the House
For buyers with limited means, an FHA loan may be the only option. The minimum down payment is 3.5% for those who qualify. FHA loans now have more stringent requirements for down payments that depend on the credit rating of the borrower. Borrowers with a credit rating under 580 have to come up with a 10% down payment, and pay the Mortgage Insurance Premium of 2.25%.
These loans feature possible funding for capital improvements, as well as no penalties for early payment. The downside is that FHA loans may not be enough to finance the home you want, and the MIP may cost more than Private Mortgage Insurance overall.
20% Down Payment Still the Standard for Conventional Mortgages
A conventional mortgage will usually require at least 20% of the purchase price down to get the best rates, though this varies widely depending on which lender you decide to go with. The advantage of putting up more than 20% on any type of loan is the avoidance of PMI, or Private Mortgage Insurance. This is basically a monthly or yearly fee paid by the borrower to insure the lender against the risk of default on the mortgage. Typically, this will run something like $55 a month per $100,000 of financed home value, and can be up to $1,500 a year and can tack on significant additional costs to your mortgage payment.
VA Loans Offer Lowest Downpayment Requirements for Veterans, but Beware of Fees
For veterans, the answer to the question of “How much should I put down on a house?” is more clear cut. VA loans have many benefits and advantages, such as not requiring a down payment and not charging penalties for early payments. The PMI is replaced by the funding fee, which is 2.15% of the loan on average. The smartest way for veterans to play this is to take out a loan with no down payment, and pay off the loan as quickly as possible. It gives you budgeting flexibility for rainy days and can save a lot when it comes to interest payed over the life of the loan. The only problem is that not having to put up a down payment may goad buyers into taking out loans on homes that are ultimately out of their price range.
Determining the dollar amount of a reasonable down payment on a house involves a bit of strategy, forward thinking and simple arithmetic. On the one hand, laying down more cash at the beginning of the mortgage reduces monthly payments and interest charges.
However, this also will significantly draw down savings leaving you more vulnerable to mishaps and misfortune in the future should you run into unforeseen expenses. Life is uncertain and things can happen that you weren’t planning on, so you don’t want to leave yourself too vulnerable to life’s uncertainties by trying to pay off the loan too quickly.
Mortgages are never easy and will most likely be one of the most difficult and important financial decisions you face during your lifetime. In an area such as this, it never hurts to do too much research or to be over prepared with questions about every facet of the agreement. It almost always makes sense to put up more than the required minimum down payment on a mortgage.
How much more is the tricky part. The best advice for first time home buyers is to do the math, carefully weigh your options and be sure of what you’re doing before locking yourself into any long-term contract.
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