Great River Federal Credit Union on The Down Payment Difference Helps Homebuyers
Monday, October 17, 2016
St. Cloud Times (October 17, 2016) - Buying a home can be a complex, challenging process. And, one of the biggest challenges that many buyers face is having enough saved for a down payment.
Why is a down payment so important?
“For starters, a down payment is the amount saved you put down against the purchase of the home,” says Allen Faber, Mortgage Loan Officer at Great River Federal Credit Union in Waite Park. “A down payment gives you more buying power.”
In particular, there’s an improved chance that you’ll actually get the loan you want. A larger down payment means a smaller principal loan amount, therefore a smaller monthly payment. And, a larger down payment often means a better interest rate, which can save you thousands, if not tens of thousands of dollars, over the life of a mortgage.
“The more money you put down, the less the principal, and therefore, the less interest accruing each month lowering your monthly payment.” says Faber.
Having more money saved to put down means the buying process usually will be smoother. Once you find a house you love, you want to be in a good position to buy right away, especially in this market. Faber notes that 2016 has been a seller’s market – there’s not a large inventory of homes for sale. On average, houses in Central Minnesota are getting purchased quickly. So pre-approvals need to move quickly. Sellers are often in a situation of multiple offers.
So how much should you put down? With down payments, the gold standard has been 20 percent; on a $200,000 house, that’s $40,000 down. Usually, buyers on their second or third (or beyond) house purchases often use the profits from the sale of their previous house to put down on the next house.
But for first-time home buyers, that means saving $40,000 for a $200,000 home. That isn’t always very easy.
Don’t fret if you don’t have 20 percent to put down; there are still plenty of ways to buy a home. There are many programs available that help support buyers that have little or even no down payment.
If you don’t have 20 percent saved to put down, you usually have to pay PMI, or private mortgage insurance, as part of your monthly payment.
Mortgage insurance enables borrowers that do not have a large down payment access to home ownership.
The actual dollar amount of PMI can vary, depending on the buyer. “It’s a matrix calculation between the loan amount, your credit score and the amount you have down,” said Faber. “The bigger the down payment and higher your credit score, the lower your mortgage insurance is. Mortgage insurance will come off as you build equity.”