When is time to buy a home, most will take out a mortgage. There are many things to consider when taking on a mortgage loan, including interest rates, closing costs and the down payment. Once you calculate the price of a home you can comfortably afford, you can start looking at properties.
In case you are buying your first home, a down payment is the amount of cash you pay upfront when buying a home. This money shows the lender that you are capable of saving and willing to risk this money in the purchasing of the home.
Conventional Loans-The Magic Number
You’ve probably heard that 20% is the magic number for a down payment. While some people (like veterans) can qualify for homebuying assistance, most people will have to put 20% down to secure their mortgage without paying private mortgage insurance (thus adding to your monthly payment). Private mortgage insurance (PMI) covers the lender, in case you get into trouble making payments down the line.
With a 20% down payment and buying an averaged price home of $430,000 in San Diego, that would mean a down payment of $86,000. This is quite a bit of money, especially for first time homebuyers. Plus, there are additional closing costs. Luckily, newer conventional loan programs allow as little as a 3% down payment, although private mortgage insurance is must in these cases.
While the financial crisis left many homeowners defaulting on their little-to-no-money-down mortgages, the tide has turned again, and now the minimum amount needed for a FHA loan is only 3.5% (there are some zero-down mortgage programs, but with restrictions). FHA loans are great for homebuyers that don’t have stellar credit and lower amounts of cash for a down payment. Private mortgage insurance (PMI) rates are higher with these loans than its conventional counterpart.
Any good lender can tell you if you qualify for a loan backed by the Federal Housing Administration (FHA). You can also look for state and region-specific down payment assistant opportunities through your local government. If you are buying a house with less than the typical down payment needed, it’s important to know that you are taking on more risk, and the loan will normally cost you more in the long run.
Before you apply for a home loan, it’s important to know what your credit score is. The difference of just a few credit score points can mean a lower interest rate and a major savings over the life of your loan.
Your down payment amount makes a big difference both now and in the future, but it’s a good idea to leave yourself enough money to afford your next few monthly payments as well as closing costs and other repair & maintenance expenses the house may need. Remember, this is just the beginning.
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