Tim McLaughlin, VP Weichert Financial Services
Getting a low down payment mortgage can provide you with a means to purchase a home without coming up with a large amount of money upfront. While this type of mortgage can be beneficial, there are a few potential drawbacks that you will need to know about to analyze if putting more money down is right for you. Here are a few things to consider about low down payment mortgages.
Low Down Payment
With a standard mortgage without mortgage insurance, you are going to have to come up with at least 20% of the purchase price out of your pocket. This can be a very significant investment for first time homebuyers or when you get into more expensive homes. When you opt to go with a low down payment mortgage, you will be able to invest a lot less of your own money. For example, with an FHA loan, you can put down as little as 3.5% of the purchase price.
The biggest benefit of getting this type of mortgage is that you are going to be able to hold onto your cash reserves. When you put a substantial amount of money down, this is going to cut into the amount of savings that you have. Being able to have a large amount of money in savings is going to be beneficial in a number of different ways. You will have capital available to invest, to furnish your home, for emergencies, and with higher reserves, that will also help in the qualification process.
Private Mortgage Insurance
One of the drawbacks of getting a low down payment mortgage is that you are going to have to obtain private mortgage insurance. Private mortgage insurance is a type of insurance that you must pay in lieu of putting 20% down. The investor is going to require this in order to insure themselves against the possibility of you defaulting on the mortgage. If you default on the mortgage, the private mortgage insurance company is going to pay the lender a part of the balance that is owed. Private mortgage insurance is going to add money to your monthly payment, however, once your loan to value reduces to 77.5%, via appreciation or via principal reduction, the mortgage insurance may be removed.
Something else that you will want to take into consideration is the interest rate. Many times, lenders are going to give you a lower interest rate when you make a larger down payment. Therefore, you are going to have to decide whether putting a small amount of money down is going to be in your best interest in the long run. If your interest rate is higher, your monthly payment may increase.
Making the Decision
If you can get a low interest rate and the private mortgage insurance is not too unbearable for you, getting a low down payment mortgage can be beneficial. Just make sure that you are not going to be paying too much money overall so you can avoid paying extra upfront. Need help analyzing? Ask us how!