How Much of a Down Payment can you Afford for your New Home?

Before settling your home deal, it is better to think about how much you can afford as the down payment. Most of the mortgage companies require that you pay at least 20% of the total cost of the house as down payment. This is a comfortable value as it not only protects the lenders from default but also gives a relaxed position to the borrower in paying off the mortgage.

The lenders keep the marginal value as 20% considering the real estate market fluctuation. There are situations when the property value drops and the borrower defaults on the loan, and so, if the lender has to foreclose the loan, they will be at loss. Keeping these situations well in priority, many banks and mortgage companies insist that the buyer pay off at least 20% of the property value as the down payment.

However, there are some mortgage plans, which offer you loan for low down payment options up to a minimum of 3%. In such situations, the mortgage companies insist you to obtain a Private Mortgage Insurance (PMI) in order to protect themselves in case you go default on the mortgage. The PMI will cost the borrower several hundred dollars per year, and if added to the cost of the mortgage, it is a significant amount that is added as an extra cost to your loan.

Furthermore, your process of getting the mortgage sanctioned becomes cumbersome if you opt for less than 20% down payment plan. Many mortgage companies and banks force you to pay a higher up-front fees compared to those who opt for 20% or more down payment plan. Most of the banks offer this facility to borrowers only if they maintain a good credit record. Also, You may not get a bargain option from the mortgage companies and may end up choosing the higher rates of mortgage.

Therefore, it is advised that you save some amount for your house well in advance and then look towards it. Don’t buy your house if you are bankrupt even if the market conditions are favorable to you. Even if you get a good bargain on your property, the higher mortgage cost will not promise a good return from your property. If your finance credit does not suit to pay off your mortgage, it will upset your day-to-day financial affairs. Above all, there is always a risk on the property value that you cannot predict at all.

There are many important factors that decide your mortgage efficiency and thus your down payment share. Having an excellent credit history is an important factor while going for any mortgage plan. The better your credit history, the more is your bargaining power. There are other concerns too, such as your debts, car loans, credit card payments, etc., for your financiers. Therefore, it is always better if you could set up a good financial plan years before you start your home hunting.

There are many ways to save for the down payment for your house. You can invest your money in the stock market, and as soon as the favorable situation comes, you can liquidate the cash and go for the purchase, or you can reinvest in different plans such as the money market mutual funds. Investing in bonds is a good option if you have the time to wait for three to five years. If you don’t want to get into the market risks, you can simply deposit it in your savings bank account even if they promise a low return for your money.

Owning a property is as good as any other best investment plans. Therefore, you need not worry even if you shell out your best investment for the sake of your home purchase. Most of the employees opt for borrowing from their Individual Retirement Account also. The 1997 tax law amendments have created a favorable situation to the employees by allowing them a penalty-free withdrawals from their retirement accounts for the first-time home purchase. And, there is the last hope, a second mortgage option. The second mortgage can be obtained from your primary lender itself or from other banks or financial institutions though it is often difficult to achieve.

Considering all these situations, one can undoubtedly say that an 80-20 is the ideal ratio of mortgage to down payment for your home.