When it comes to applying for a mortgage, many consumers are not sure how much money they should put toward their down payment. Mortgage advertisements boast about down payments as low as 5 percent, but is a low down payment really in the borrower’s best interest?
Although requirements differ by lender, evidence suggests that borrowers who have saved enough to put at least 20 percent of the home’s value toward a down payment fare better. Large down payments reduce the risk of defaults so lenders reward these borrowers by offering lower rates or waiving the need for private mortgage insurance. Private mortgage insurance (PMI) is a third-party safeguard that helps protect the lender from taking a loss if borrowers default on their mortgages. PMI is normally required for those who put less than 20 percent down, resulting in a loan-to-value ratio of more than 80 percent. The premium for private mortgage insurance is added to a borrower’s monthly payment or added as a rate premium.
As a result, someone putting 5 percent down will save up-front, but will find themselves paying much more for that house in the long-run after factoring in the cost of PMI and the higher interest cost that comes with a larger mortgage.
But before you put your entire savings toward your mortgage down payment, be sure to calculate the additional expenses that come with buying a home. Closing costs, moving expenses, and new home furnishings all need to be considered. And most lenders will require you to set aside a few months’ worth of mortgage payments in your savings. So as you determine the size of your down payment, be sure to factor in these additional expenses.
Choosing how much to put down on your mortgage can be tricky, so don’t hesitate to contact your lender for advice. Washington Federal is your home loan specialist and will work with you throughout the mortgage process. Visit our Mortgage Calculator for a better idea of how much your monthly payment will change depending on the down payment amount.