Understanding the down payment and mortgage relationship is critical if you are getting into homeownership. In some situations, there are times when you want to minimize the down payment.
A down payment is simply your out of pocket cost when buying a home. Typically, the less you put down, the harsher the terms you will have to agree to when it comes to the financing. Lenders like to see borrowers share as much of the risk as possible on a loan. The more you share, the better terms they will give you. The sharing part of the process is the amount of money you put down.
In general, putting as much down as possible is a good idea. If you can put 20 percent or more down, you can avoid paying private mortgage insurance. It will save you a couple hundred bucks a month. You can also immediately create equity in your home, which can be used if you run into financial problems. In many ways, equity is the biggest savings method most people have these days.
Ah, but are there situations where you want to minimize your down payment? Yes, there are a couple of them. Let’s take a look.
Some of the more popular shows on television cover flipping a home. Flipping simply refers to taking a “beater” and fixing it up. Once fixed, you can turn around and sell the home at a profit. In such a situation, you need to minimize your down payment because you will be using your cash for the improvements. Further, you do not really care about the interest rate on the home because your goal is to sell it fairly quickly. In short, there is no advantage to making a big down payment.
Another area where down payment amounts come into play has to do with time. If you are going to be living in an area for a relatively short amount of time, it may make sense to minimize your down payment. People in the military, for instance, often serve 2 or 4 years in a particular location and then are transferred to a new location. Since the move is mandatory, one can’t be sure how long it will take to sell and old home. This means you may want to minimize the cash investment in your old home so you have it on hand to buy a new one.
Obviously, there are other issues where a small down payment makes more sense than a big one. The point of this article is to give some thought to how much you should pay given your particular situation. Don’t just go with the traditional amounts.
Raynor James is with FSBOAmerica.org - get information on mortgage loans .