When you are saving money to buy your first home, it can be daunting to think about the amount of money you need to save to become a first time home owner. While there are loans that require only 3.5% down payment which is insured by the FHA (Federal Housing Administration), these loans require you to have mortgage insurance for the duration of the mortgage, this makes monthly mortgage payments higher.
Most banks make mortgage loans with a down payment of 10% or 20%, although there are some lenders who offer conventional loans that require only 5% initial down payment. For those types of loans, we advised to consult with your lender to see what is the best option is for you and also to find out what are the advantages and disadvantages of each of these loans.
Why 20% is an ideal lenders loan?
Mortgage lenders evaluate your credit profile, your debt ratio to income, work history and how much you have saved to confirm if you are a person who could make monthly mortgage payments without problems. 20% down is considered an ideal amount by the lenders because you are investing a significant amount of your own money and making the lender risk is minimal. When buying a house with 20% down, you will have a lower monthly payment and will not pay for the loan insurance PMI (private mortgage insurance)
Advantages and disadvantages of putting 20% down
- Besides eliminating the need for PMI, by putting 20% down payment, it will be easier to qualify for the mortgage loan and the interest rate will be lower as well.
- The other benefit is that you will have to burrow less money and therefore your monthly payments will be lower.
- In addition, you will own 20% of the value of your home, giving you the ability to get a home equity loan from another bank for an amount equal to 20%
On the other hand, getting 20% down payment to buy a home of about $ 200,000 is $ 40,000, this may take many years to save this amount, Keep in mind, when buying a house you will also need money for other expenses such as; closing costs, prepaid taxes, moving expenses and an emergency fund. It is also possible that while you are saving money for the down payment, house prices and interest rate may go up.
Advantages and disadvantages of a lower down payment.
If you buy a home with a down payment of 10%, a house of about $ 200,000, will require a $20,000 down payment. if you buy the house with a 5% down payment, the amount will be about $ 10,000, using a smaller down payment will allow you to become a home owner sooner. You can get your home faster because you don’t have to have as much money. It is recommended to save a little more to avoid problems in case of an emergency or other arrangements such as maintenance and repairs.
The disadvantages of a smaller down payment is; you will have to pay PMI to your lender, thus making you monthly payments higher . Your mortgage interest rate will be higher, so your monthly payments will be larger, too.
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