What Down Payment Should I Make?

By March 5, 2015Life Coach, Loan Talk

What Down Payment Should You Make On Your Home Purchase?

When you are purchasing a home, some physician’s loans offer loan programs that require either zero down or a low down payment. While it is tempting to accept a loan program with the minimum down payment available, there can be a downside to this strategy. If the only way to purchase the home is with the low down payment option, then certainly, this is why the programs are there.

If, however, you have saved up some funds for the purchase of a home, you may find more favorable options available with a larger down payment. Compare the advantages to a larger down payment with the lower down payment options to determine which will provide the lowest overall costs.

Interest Rates

One of the big downsides to a low down payment is generally a higher interest rate. The bank sets rates based on the amount of risk they are carrying on the loan. The lower the down payment, the higher the perceived risk is to the bank. This means that accepting zero down payment or low down payment options will generally result in a higher interest rate over the life of the loan. Be sure to compare all loan programs that you qualify for, not just the ones with the lowest down payment requirements. While you can choose to refinance down the road, you do not know what the market rates will be and the cost of refinancing can be expensive.

Mortgage Insurance

For most home purchases with less than 20% down, mortgage insurance is required on the loan. This is an insurance premium that the buyer pays, which guarantees payment of the loan to the bank, in the event of a default. Generally there is a percentage added to the initial closing costs and then a monthly premium that is incurred each month the loan is outstanding. Some mortgage insurance payments will drop off after you have reached the 20% equity mark, others will remain until the home is sold or refinanced.

Mortgage insurance can run up to a couple hundred dollars each month depending on the initial loan amount and it is added to your mortgage payment. This will impact the loan amount you qualify for and will reduce the cost of the home you are able to purchase. Some physician’s loans will waive the mortgage insurance requirement.

Instant Equity

Not putting a down payment on the home you buy or putting the minimum down could result in the inability to sell your home if you need to move soon after a home purchase. When you sell a home there are seller closing costs that generally run from 8% to 10% of the sales price. A low down payment can result in you needing to pay money at closing in order to sell your house. For this reason it is important to consider how long you think you will be in the home as well as how much you want to put down. The longer you stay in the home the more likely the home will appreciate and you will pay down the mortgage, thus creating equity.

Smaller Monthly Payment or More Expensive Home

A down payment will enable you to either have a smaller monthly payment or can enable you to purchase a more expensive property. This can be exponential when you consider that the interest rate will be lower and the possibility of eliminating the mortgage insurance payment can make a dramatic difference to your monthly payment.

Conclusion

Just because you can purchase a home with a minimum amount down does not mean that you should. Consider your personal circumstances and then evaluate the above factors. This can help you decide how much you want to put down on the home you are trying to purchase. Meeting with a lender and discussing your personal situation can provide good insights about which down payment options will best meet your needs.

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