How Much Should I Put for a Down Payment?

Wednesday, December 5, 2012

It’s not always easy to save up enough to make the traditional 20 percent down payment on a home. Fortunately, lenders today offer many low-down-payment mortgages. But when deciding how much to put down, you should consider the following:

Is 20 percent the standard down payment?

In order to qualify for a conventional mortgage, lenders usually require a minimum down payment of 20 percent. If you put down less than 20 percent, most lenders will require you buy Private Mortgage Insurance (PMI). This insurance typically costs about one-half of 1 percent of the purchase price of the home and protects the lender in the event that you should default on the loan. Your overall mortgage costs will therefore be less if you come up with 20 percent down and can avoid having to pay PMI.

What if I put down less than 20 percent?

If you can’t afford a 20 percent down payment, paying PMI may be your best option. And once you reach 22 percent equity in your home (or sometimes 20 percent equity with a good payment history), you can get your lender to cancel the insurance. An alternative is to apply for an 80/10/10 loan. It enables you to avoid PMI by financing half of the required 20 percent down payment with a second mortgage. The way it works is that 80 percent of the purchase price of a home is financed through a first mortgage, 10 percent through a second mortgage, with the final 10 percent coming from the down payment. Or you can apply for a government-insured FHA loan. Again, you will have to pay for insurance, but you may qualify with a down payment as little as 3 percent.

What about putting down no money at all?

It is possible to finance 100 percent of the purchase price of a home with a mortgage that requires no money down. The disadvantage of this type of financing is that you are likely to be charged a higher interest rate than that of a standard mortgage. This means your monthly mortgage payment will be higher. Also, because you didn’t make the standard 20 percent down payment, you will have to pay PMI.