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 If
you are a first time home buyer, this is probably one of the biggest
questions you have. You
may have also found out that the answer to this question depends on
who you ask. The answer
to this question is not cut and clear and is neither “as little as
you can” nor is it “as much as you can”.
The answer really is “it depends”.
The following are some of the down payment strategies
available and the advantages and disadvantages of each.
Nothing Down
It is technically possible to buy with “Nothing
Down” and there are quite a few books on the market that detail this
strategy. Usually, this
is a strategy one uses when buying an investment property – either
to rent it out or to flip it.
It can, however, be used for an owner occupied primary
residence.
There are many loan techniques that accomplish
“Nothing Down” and for more details it is best to speak with a loans
representative. However,
the majority of these techniques involve taking out one large loan
for approximately 80% of the house value and one or more smaller
loans for the balance.
These smaller loans typically have high interest rates.
It is also likely that the primary loan also has a higher
interest rate than normal due to the higher risk for the bank.
Personally, in almost all circumstances I do
not recommend buying your first home with nothing down.
Due to the fact that no principal on the house has been paid
and due to the higher interest rate many people who purchase their
primary residences with this technique are forced into foreclosure
in the future. Many
predatory real estate agents and loan representatives may push you
towards these loans, but I would advise you to seek a third party
financial expert to determine whether you meet the rare criteria
that make this a wise choice.
Five or ten percent down
In most cases, five percent down is the minimum
amount that will enable you to purchase a primary residence.
There are government sponsored special loan programs
available for individuals with less than five percent down and
details about these programs can be obtained from a loan
representative.
Generally banks require a twenty percent down
payment on a house or else they force the buyers to purchase a
special type of insurance called Private Mortgage Insurance (PMI).
This is insurance for the bank – not for you – and guarantees
the bank payment in case you default on your loan.
If you put less than twenty percent down on a
house, you must either purchase private mortgage insurance or take
out multiple loans. In
the multiple loans technique, you take out one loan for 80% of the
house value and another loan for the balance.
This second loan has a higher interest rate.
The advantages of taking out two loans over paying Private
Mortgage Insurance are the following.
ü
Your total payment is usually less.
ü
Most lenders require PMI to be paid
for a specified amount of time.
Even if your house increases in value you may have to pay PMI
for several years. With
multiple loans, you can always refinance the house with one larger
loan once the value of your property has increased to where you have
at least twenty percent equity.
Of course, some loans have a minimum amount of time that must
elapse before you can refinance, but most fair loans will not
contain this stipulation.
Twenty percent or more down
If you put at least twenty percent down on a
house, you will not need to worry about Private Mortgage Insurance.
In addition, the more you put down on average the better
interest rates you will receive, up to a certain percentage.
There are several reasons why you may want to
put more or less down on a house.
Reasons to
put more down
ü
You want to lower your monthly
payment
ü
You want to avoid a Jumbo Loan.
A jumbo loan is a loan that exceeds a certain dollar amount.
Loans over this amount bear higher interest rates.
The jumbo loan amount increases each year.
For the current amount contact a loan representative or a
real estate agent.
Reasons to
put less down
ü
You want to keep money aside for
renovations to the house
ü
You want to purchase an investment
property
ü
You need to keep funds in reserve to
make payments in case of an accident or emergency (which is always a
good idea)
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