Down Payments
When purchasing a new home, one of the biggest decisions
you will make is what sort of down payment you are going to
place on your home. Down payment amounts have a big affect
on several aspects of your purchase, including your principal
mortgage. While many are limited by savings in their down
payment options, those who have a choice will need to consider
several factors in deciding on how much money to put down.
The main question you will have to answer is if the money
you are considering adding to your down payment will earn
you a better return if put to another use. When considering
this question, you may be tempted at first only to consider
the interest rate on your principal mortgage. For example,
suppose you have a seven percent rate on your loan. An increase
in down payment of $5000 will decrease your loan by the same
amount, and save you from paying interest on that $5000.
However, there are other factors to consider. First, you
have to consider how much an extra down payment will save
you in upfront fees expressed as a percentage of your loan
amount (fixed dollar fees don’t factor in, for obvious
reasons). Also, you should consider how an extra down payment
might affect your need for mortgage insurance.
A down payment equal to 20 percent of the purchase price
eliminates the need for mortgage insurance. The savings realized
by not paying mortgage insurance premiums must be considered
when thinking about whether to make a higher down payment,
if the down payment amount would put you over the 20 percent
threshold.
Another possibility to consider is that a higher down payment
might lower your rate. This could be true if the extra down
payment would bring your principal mortgage amount below $252,700.
This figure is significant because it is the limit over which
federal secondary mortgage agencies such as Fannie Mae or
Freddie Mac won’t purchase loans. Loans for below this
amount save anywhere between a quarter and three eights of
a percentage in interest. If applicable, this lower rate must
be factored in with your down payment decision.
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