5 reasons to save for a big down payment
You may be eager to buy a home. But taking time to save a large down payment has numerous advantages.
Most homebuyers have to finance most of the home's purchase price with a mortgage. The amount you put down upfront determines the size of the mortgage. A conventional mortgage usually requires a down payment of 20% of the purchase price of the house.
Knowing how much of a down payment to save for can be tough. The larger the down payment, the longer it takes to save. (Bing: Do you qualify for down-payment assistance?)
There are, however, several benefits to waiting to purchase until you have enough for a down payment of 20% or more.
1. Reduced mortgage payments
The more you put down on your home upfront, the smaller your mortgage payments will be. That could help your monthly budget. More important, you could save thousands of dollars in interest in the long run. For example, on a 30-year mortgage at 5% interest, putting an extra $10,000 into the down payment will save you $9,325 in interest payments over the life of the loan.
2. Lower interest rate
Lenders often offer better interest rates to borrowers with a lower loan-to-value ratio, or the percentage of the purchase price that you're financing. An increase in your down payment lowers the ratio and reduces the risk to the lender that you will be unable to pay your full loan balance. Lower interest rates can also save you money over the life of the mortgage.
3. No mortgage-insurance fees
If you want to contribute a smaller down payment than the traditional 20%, most lenders require that you take out mortgage insurance. This insurance protects the lender in case you cannot pay your mortgage. Federal insurance programs are available to qualified purchasers, in addition to private insurance options. Mortgage insurance can be expensive, ranging from 0.5% to 1% of the home's value annually to several thousand dollars per year. The insurance premiums are an extra cost of the mortgage and are not applied to the mortgage balance.
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4. Less risk when selling
Real-estate values can move up or down after you buy your house. If the market is in a down swing and you have to sell your house, you may find that your mortgage balance is higher than the value of your home. This is known as being "upside down" or "underwater" on your mortgage. This situation gives you less flexibility in accepting offers and may make it difficult to sell your home and pay your mortgage.
- MSN Money: Kill the mortgage tax deduction?
If you made a substantial down payment when you bought your house, you are less likely to be upside down on the mortgage.
- On our blog, 'Listed': Trulia: Buying costs 45% less than renting
5. Ability to ride out financial crises
The future is unpredictable. You may encounter a personal financial crisis, such as job loss or illness, that can impair your ability to pay your mortgage. If you have equity in your home because of making a large down payment, you can better weather a financial storm. The mortgage payment will be smaller, and you could borrow against the equity, if necessary. If you borrowed the maximum possible based on two incomes, you could face financial stress and perhaps even foreclosure.
Taking the time to save money for a down payment on your mortgage is a solid investment. It can save you thousands of dollars over the course of the mortgage and can put you on more solid financial footing.
Anyone here ever watch Dave Ramsey? What is one of the points he constantly tries to get across? It is that debt is bad, pay off your loans as fast as possible if you want to accumulate money. Don't buy into the big banks theory that interest payments are good. Interest payments are only good for one person and that is not you, it is good for the bankers!!
Also, another cable show star Susie stresses that if you can't afford it you are DENIED! Renting is ok if you can not afford a proper down payment, think you might have to relocate due to a job change, or just do not think the housing market is at a bottom yet. Just like you don't let a sleezy car salesman sell you that used car you can not afford do not give in to the bad advice of realitors or bankers if it doesnt pass your smell test.
If i was able to save up enough money to put down on a house,the last thing i would do is put it down on a house.
There is no advantages to owning a house rather then renting,in fact there's less.
Yes you get to write off the interest and other big repairs,but the repairs you cant write off all at once.Its devided over several years.And the interest that you pay dont even come close to what you get back in refund.If you want to move 5 or 10 years down the road your return wont even come close to what you payed in to the bank.Not to mention all the small items you cant write off that you wont even want to think about.Not to mention the 7 or 8 percent the realestate agent takes off the top when you sell and the 1% the city or town takes for tax for moving out of the area.Plus other inspection fees you pay the town to make sure everything is up to code.Also if your looking to get the most out of your home as far as price then you will probably have to sit on it for awhile to find another sucker wanting to buy it,which most of the time takes longer than you want.But now you want to move soon,so now you drop the price and get low balled by buyer because you just want to move so you lower the price a little more.OWNING a house is to much headache and hassel.
RENTING is much more affordable and less headache.And the money if any saved would go tord myself or family on a trip or other nesessities that my family would need.That old saying living the family American dream and owning your own home is out dated for the middle class.
The only reason I can see to save the 20% down is to learn discipline, but I would still then put only 5% down and keep the rest of my money in an account for a rainy day.
Every person has a different situation (where they live, income potential, risk tolerance, etc.). No two situtations are the same. Some people are more willing to take on higher levels of debt...and can handle it. Some people have a harder time living with higher levels of debt and taking on more risk. I agree that professional advice for a person's individual situation is a great idea. Find someone you trust. I personally believe home ownership in general is a very good thing. It has historically been a great way to build equity and personal wealth. Everyone has to pay for someplace to live, so paying a mortgage vs. renting is generally better. The last few years has turned that thought process kind of sideways so people are going to be more cautious. Paying PMI to get into a home is generally a good idea, particularly when you consider that interest rates are REALLY low. They can't go much lower and home prices are at the lowest levels we may ever see in our lifetimes. Good luck no matter what choice you make.
when she say if you put an extra $10,000 you end up saving $9,325 what she means is that your principal will go down $10,000 but instead of paying $90,000 in interest you will pay $80,675 and she means paying the $10,000 extra in your down payment not the first payment the more you put down the lower your monthly payment will be
the reason why your payment go down so much with 20% down is because after the 20% down you pay your own taxes and insurance instead of sending this extra money to the loan holder
Just get in one. If you default and the bank repo's you loose more. Double up on your payments when able. Pay down and stay months ahead of monthly payments as a cushion.
America wants us to be in financial servitude. Don't fall foe it. Make your own strategy.
Okay. I rent. $700.00 a month. I don't pay the property tax. I don't pay the insurance. I don't pay for maintenance.
To buy a home, I'd need to have a mortgage payment somewhere in the $400.00 a month range, so I could afford the TAXES, INS., MAINT.
And in this market, if I were to lose my job, I wouldn't have the flexability of walking away from the rented home if it were necessary.
Be very careful what you do in today's housing market. Do you really NEED to own a home, or just WANT to?
Wow, where do I even begin to rip apart this article. Sorry Angie but I think you are way off base on so many points. let's go from point to point.
1) So you are saying I buy a $200k house and put 20%, $40k, down, financing $160?.
How about buy a $170k house and put $8000 down and keep $32k in your bank account?
(yes there is PMI, more on this later)
2) If you qualify for a conventional 5% down loan, the rate can be the same as putting 20% down. It certainly is on FHA insured loans.
3) Mortgage insurance is your ally, not your enemy. I will gladly exchange a monthly PMI payment, which is not permanent, which is also tax deductible for many, many people by the way, in exchange for keeping $32k of my money in the bank.
4) If you put 5% down and the value goes down and you need to sell, you have the money to bring to the closing table to close out the mortgage because you didn't put it down in the first place.
5) And for the most ridiculous statement... If you lose a job or have an illness, having $30k in the bank is far more valuable than having a mortgage payment $100 lower. Also, if you have a job loss, exactly how are you going to qualify to take out an equity loan? Which would be just trying to borrow back the money you put down in the first place? And pay interest to do so! How ridiculous is that! Not to mention, you aren't going to find an equity loan going above 80% of your homes appraised value. An equity LINE to 85%, maybe.
Putting down payments into a home is horrible financial planning. I often have clients who are recieving a gift to help with the down payment on a home from well meaning parents. When I show them the difference putting the extra into the principle may only lower the payment $30, they see the common sense of spending the money on the house to spruce it up and make it theirs, and not the down payment.
I have been a mortgage broker/banker for 16 years. Mortgage opinions and advice should not be given by anyone who does not have an NMLS license number in the same way they should not give tax advice if they are not a CPA, or legal advice if they are not a licensed attorney.
Let's see here:
I'm going to spend $10,000 now to save $9,325 in interest payments over the life of the loan or 30 years. Say that again out loud. Spend $10,000 now to save $9,325 in 30 YEARS.
The interest in this example doesn't matter because I'm writing it off on my taxes anyway.
Let's not forget that once you dump that extra money into your home, it's going to be next to impossible to get it back out. Sure you increased your equity position but that's just monopoly money until you actual "realize it" by selling your home and once that happens you're going cough up well over 6% of the sales price for agent fees and closing costs.
When I bought my home I put extra down to avoid a Jumbo loan (limit was much lower then), PMI, and having to escrow taxes and insurance with the mortgage holder. At the time 30 year fixed rates were 6% and I was able to get a 5/1 ARM at 3 7/8%. I did the latter, but made payments as if it were the 30 year fixed at 6%. Doing this I reduced the principle more quickly. I was able to refi at 4.25% for a 30 year fixed because even with the value declining, I had enough equity to do so. A 15 year fixed would have been 3.75%, but I decided for the 30 year for flexibility - I'll pay it off at a 15 year rate, but can backoff to the lower normal payment if I need to.