For many homebuyers, figuring out the details of financing their purchase can be a daunting task. After all, a home is likely the largest purchase a person makes in their lifetime. One of the decisions to be made is whether to go with a standard or low down payment mortgage.
Tim McLaughlin, a senior vice president for Weichert Financial Services, offers these tips:
- Amount of Cash On Hand and In Reserve. Standard mortgages require at least a 20 percent down payment, while with an FHA loan you can put down as little as 3.5 percent of the purchase price. If you go with a low down payment loan, you don’t have to invest as much of your money and can keep money in reserve to invest or to use for home improvements.
- Private Mortgage Insurance. One of the drawbacks of a low down payment loan is that you will be required to obtain private mortgage insurance. This is a type of insurance that protects the lender against the possibility of you defaulting on the mortgage. It will add money to your monthly payment, but can be removed once the balance on your mortgage is less than 80 percent of the home’s purchase price.
- Interest Rate. Many times, lenders offer a lower interest rate to borrowers who make larger down payments. Homebuyers need to weigh the cost of putting a small amount of money down, since monthly payments can be more if interest rates are higher.