Getting the Best Mortgage Loan Deals - Why Down Payment is a Huge Factor
Staff Writer
2009-04-18
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Before applying for a mortgage loan, save as much money as you can for the down payment. The more money you put down, the more you'll be saving in the long run. The more money you have to borrow, the more interest you'll have to pay. Also, if you put down more money, you'll get better interest rate deals and a better mortgage plan. Furthermore, you'll secure a sizeable portion of the home's equity. You can obtain money for the down payment from various sources including your personal savings, assets, sales of investments, pension plan funds, and assistance from relatives and friends. Parents can also help their children get a lower interest rate by giving a cash gift or a loan, by depositing the money with the lender, by consigning, or by acting as co-mortgagers.
Aside from maintaining a good credit score, you can get lower rates on your mortgage by making a large down payment. A large down payment will also make it easier for you to obtain a mortgage. The minimum standard for most down payments is 20% of the value of the home. However, some lenders loan money even with as little as 5% down payments. In this case, lenders will require the borrower to pay for additional insurance to protect the lender in case that the borrower defaults on the loan. This type of insurance, called Private Mortgage Insurance (PMI), insures the lender against financial losses during defaults and foreclosures. PMI is also paid monthly, as part of the monthly mortgage payments. The amount of PMI will depend on the amount of down payment and loan. As the equity of the homeowner builds up to 20 or 30 percent, the PMI may already be dropped.
Lastly, you should always borrow within your means. Only buy a home that you can actually afford with your current income and lifestyle. You monthly mortgage payments should be, at most, 25% of your gross monthly income. By multiplying your gross income by .27, you'll be able to know how much mortgage loan you can afford to borrow. You can then subtract the estimated monthly cost for home insurance and property taxes to get your AMMP or affordable monthly mortgage payment. To get the AMA or affordable mortgage amount, divide the AMMPY by your mortgage term and rate and multiply the amount by $1,000.00. To arrive at the affordable home purchasing price, you will divide the AMA by the amount being financed.
Don't be too excited about mortgage loans that carry zero down payment. These kinds of loans usually have exorbitant interest rates and you end up paying for a lot more than the value of the home in the long run. In short, it's not a very wise investment. If you're planning to pay for the whole life of the term and you have no plans of reselling or leasing the property. Even if you do have plans of reselling, the risks for defaulting on your loan are a lot higher for these types of plans. Edward D Parry base author