The Impact of a Down Payment

By Kimberly Shane

Impact of a down payment blogOver the years we have found that the down payment requirement has left many people with questions; like how does a down payment impact your mortgage?

Let’s start with understanding what a down payment on a mortgage is; a down payment is the amount of money that you will pay out of pocket towards the purchase price of the home you are buying. Not only will it lower the amount needed for your mortgage but it also shows lenders, like us, that you are able to save money and are serious about the investment in your home. 

Does a large down payment guarantee you financing for a home?

Not necessarily. A down payment is not the only thing impacting your mortgage rate and monthly payment; income, credit history, and debt impact it too. For example, if you have 50% to put down on a house but don’t have a source of income, you won’t qualify for a mortgage.

How does a large down payment impact your mortgage?

If you do qualify for a mortgage and have a large down payment (at least 20% to put down) you will likely avoid other fees, such as private mortgage insurance (PMI). Which is good considering that PMI can run you 0.5%-1% of your entire loan amount annually; that means on a $100,000 loan the PMI cost at 0.5% is $500 and at 1% is $1,000 a year.

How does a low down payment impact your mortgage?

When putting less than 20% down, private mortgage insurance which is often seen as a monthly charge added to the mortgage payment, may be required. Private mortgage insurance protects the lender, should the borrower stop making their payments.

Is a low down payment always the best option?

Often the low or zero down payment loan option comes with an added cost, such as monthly mortgage insurance premiums. Looking at a mortgage long-term, the borrower with a low down payment ends up paying more in total than those with high down payments. They will pay more in interest rates over the life of the loan and as mentioned previously, they often are required to pay private mortgage insurance. Typically, once the mortgage loan’s balance is below 80 percent of the original value of the home, private mortgage insurance may be cancelled.

Do you have more questions about mortgage down payments? Look no further, we have answers; click here!

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