Making a Larger Down Payment: Is It Worth It?

Making a Larger Down Payment-Is It Worth It- 150x150If you are getting ready to purchase a home, you are probably wondering how much of a down payment you should make and how it will affect your budget. Deciding how much to put down can be a tough decision, because the size of the down payment will have an influence over your mortgage. Making a larger down payment is usually beneficial, if you can afford it, but it also has a few downsides. However, making a down payment that is too small will attract extra costs, such as a higher interest rate or the requirement to pay Private Mortgage Insurance (PMI).

The Advantages of Making a Larger Down Payment

Generally, unless you can invest the money that you are going to use as a down payment somewhere else, making a larger down payment can actually save you money in the long run. Your monthly mortgage payments will be lower, the interest rate that you will be paying will be lower, you’ll avoid paying for Private Mortgage Insurance and have other advantages. Let’s take a look at the most important benefits that making a larger down payment will provide.

  • Lower mortgage payments. The down payment represents a big chunk of the total loan value, so the bigger it is, the smaller the remaining amount will be, meaning that your monthly mortgage payments will also decrease. By lowering the amount left to pay on your mortgage, you save money, because you won’t pay thousands in interest over the years. Lowering your monthly payments also makes your monthly budget higher, allowing you to spend more money on other expenses.
  • Lower interest rate. The higher your loan-to-value ratio is, the more of a risk you will be in the eyes of your lender. Making a larger down payment lowers your loan-to-value ratio and the interest rate that you will have to pay. A lower interest rate means that you will be paying significantly less on your mortgage over time, even if the difference is very small.
  • No Private Mortgage Insurance. Conventional mortgage loans require a 20 percent or more down payment in order to avoid paying for Private Mortgage Insurance. When making a larger down payment, you also save money by not paying a PMI.
  • Less risk of being upside down on your mortgage. If the housing market crashes and you are forced to sell your home, having a mortgage balance that is higher than your home’s value can put you in a very difficult situation. If you have made a larger down payment when you purchased the home, the risk of being put in this situation will be much lower.
  • Build more equity in your home. A larger down payment can help you build more equity in your home much quicker. If you encounter some financial hardships in the future, you can get past them much easier because you will be able to borrow more against the equity in your home.

Larger down payments are usually considered very beneficial, but they also have a few disadvantages. The largest one being that the money used for the down payment can be invested somewhere else, where they will generate a return, or left into a savings account where they will generate interest. Another disadvantage is that, because the interest rate will be lower on your mortgage, you will have less tax deductible payments. A third disadvantage, and a very important one, is that you lose access to an emergency fund if you tap into your savings in order to make a larger down payment.

Whether you decide to make a larger down payment, invest the money, or just keep it for a rainy day, depends entirely on your financial situation and future plans. You could be saving more if you put more money down, but you shouldn’t do it at the expense of financial security.

Are You a Twenty-Something Wanting to Buy a Home? Here’s What to Know

Twenty Something- 150x150Low interest rates and home prices have always attracted many young first time home buyers. Especially now, after the recent housing market crash, people who are looking to buy a home also have the option of buying foreclosed and distressed properties, which can still be bought for much cheaper than regular homes. But the housing market crash has also caused people to be more reticent when it comes to buying a home. First time home buyers are being especially careful before making such a large purchase, who may not be as stable financially or as sure as to how long they will be living in one location.

Home ownership when you are in your twenties, if you can afford it, can also be very beneficial in the long run. You will avoid wasting money on renting a place with no potential for equity and will also have much longer to pay off your mortgage before your retirement years. You will also build equity in your home when home prices are low, an advantage that you won’t get if you are renting. However, many young home buyers are afraid that they can’t qualify for a mortgage loan, or at least one that won’t have a very high cost. Being a twenty-something home buyer is the same as buying a home at any age. The most important factors will be your credit score, your income, and the size of your down payment. The actual problem that you might encounter is that you might be a bit young to have a perfect credit score, a large income, or enough money saved up to make a large down payment, but that can happen at any age. In this article, we will take a closer look at each of these three factors and how they can affect young home buyers.

Your Credit Score

A young person will probably be worried that he or she didn’t have enough time to build a good credit score, and the lenders will automatically reject their mortgage loan application. In reality, your credit score will probably be better than you think, and easy to boost. You are in your twenties, so you shouldn’t have any large debt or dark spots on your credit report. Also, if you don’t have credit, you can establish it fairly quickly, in a couple of years. Just having a credit card that you pay on time can help your credit score reach the “perfect” range very easily.

Because you are young and maybe haven’t found a stable job, you may have some unpaid bills that you think will affect your credit score. The most important thing is to pay them as soon as possible, but, unless they are referred to collection, they won’t affect your credit score in any way. You will probably have to pay a late fee if you are late on a credit card payment, but as long as you make the payment within 30 days, your credit score won’t suffer.

Your Income

Lenders have to make sure that your income is large enough to accommodate your monthly mortgage payment, which also includes the obligatory homeowners insurance and property taxes. Lenders usually require that your monthly mortgage payment is less than 30 percent of your monthly income. Also, the total money that you owe each month, including debt such as student loans, should not be higher than 43 percent, or even less for some lenders.

Lenders will also require that you have a stable job, meaning that you have held the same job in the same organization for at least two years. Self-employed home buyers will have to provide tax returns and other records for the past two years in order to qualify for a mortgage.

Your Down Payment

Your credit score will affect how much you will have to put down when buying a home. Typically, if you have a very good credit score, you will only have to make a 10 percent down payment. But you should also keep in mind that, if you put less than 20 percent down, you will have to pay a Private Mortgage Insurance (PMI), which will make your mortgage loan more expensive overall.

An alternative can be a Federal Housing Administration (FHA) mortgage loan, which require a much lower down payment, sometimes as little as 3.5 percent. FHA loans require a larger insurance payment, but also have lower interest rates, making them a good alternative to conventional loans. Active or retired military personnel can apply for a U.S. Department of Veterans Affairs (VA) mortgage loan, which requires no down payment. People who wish to live in a rural area can apply for a mortgage loan backed by the U.S. Department of Agriculture (USDA), which has many benefits over a conventional loan, but a longer waiting period.

Buying a home in your twenties is not harder than buying a home at any age, but it may be harder to qualify for a mortgage. Because you are just starting out in life, usually fresh out of college and with some debt, you might find it more difficult to come up with the large down payment or have a good enough income. But if you can do it, buying a home when you are twenty-something will be more beneficial than waiting until you are in your thirties or forties.

10% Down Payments are Back!

10 Percent Down Payments are Back-150x150Becoming a home owner is many people’s dream, and at one point in their life, it will probably become reality. But there are several factors that need to be considered when buying a home, most of them related to how much you will be spending on your loan. Finding a home is the easy part, and you probably won’t encounter too many issues there. But making sure that you are not overpaying is a little harder, and will require some research.

Of course, your financial situation may require you to make some compromises, such as having lower monthly payments at the cost of paying more overall on your mortgage loan. Another aspect of your loan in which you can compromise is the size of your down payment. For years, the majority of lenders have required borrowers to make a 20 percent down payment, but it looks like 10 percent down payments are back, and they are an attractive alternative to many home buyers.

Advantages of Making a 10% Down Payment

Depending on how much the home that you are buying is worth, a regular 20 percent down payment can mean a large amount of money, which many home buyers are not able to afford. For some, it might take years to come up with the 20 percent down payment, so the 10 percent alternative is a good option. Besides the down payment, home buyers shouldn’t forget about other costs associated with taking out a mortgage loan, such as closing costs and insurance. Closing costs can be very high, making the 10 percent down payment even more attractive, compared with the hefty 20 percent down payment.

Another advantage of not having to save for a long time in order to come up with the 10 percent down payment is that, when saving money for a few years, there is always a chance that home prices may rise, making it impossible for you to buy a home with the amount of money that you have saved up. You should also take inflation into account- 20 percent of the cost of the home right now will, most likely, not represent 20 percent of the price of a home a few years from now.

Even if you can afford the 20 percent down payment, you can choose to only put down 10 percent and use the other 10 to finance repairs or improvements to your new home. That extra 10 percent can also be used for investing in stocks or mutual funds, but this is only recommended for those who have experience in these types of home investments.

Disadvantages of Making a 10% Down Payment

One large disadvantage to making a 10 percent down payment is that qualifying for a lower down payment is fairly difficult. Lenders require your debt to be less than 45 percent of your income, and your credit score to be above 700. Many of these restrictions apply to 20 percent down payments, as well, so qualifying for a 10 percent down payment won’t be too difficult if your only problem was coming up with the 20 percent required by all lenders until now.

Another disadvantage is that, if home prices go down in the future, you could end up with a home that is worth less than what is owed on the mortgage. If this happens, you may not be able to sell your home, which may lead to other serious issues. 10 percent down payments can also be problematic if you have little equity in your home and decide to sell. Your loan value plus selling costs can be higher than the sale price, resulting in you losing money.

10 percent down payments are back, and that is good news for home buyers with good financial situations, but who can’t or choose not to make a 20 percent down payment. But before deciding how much of a down payment to make on your home, you should calculate how much money you would save or lose with each option. If the down payment size is the only thing standing between you and home ownership, then go for it, but you shouldn’t choose to make a 10 percent down payment just because you can, without weighing in on both the advantages and disadvantages.

A Pledged Asset Mortgage is Better than Having a Down Payment, or Is It?

A Pledged Asset Mortgage is Better than Having a Down Payment, or Is It- 150x150Pledged Asset Mortgages are designed to help home buyers who wish to purchase a home but aren’t able to make a down payment. Instead of making a down payment, the home buyer is required to use assets such as stocks or mutual funds as collateral. A Pledged Asset Mortgage is also known as an Asset-Backed or Asset-Integrated Mortgage, and it is generally geared towards borrowers who can afford making monthly mortgage payments, but have all of their cash tied up in different investments.

How a Pledged Asset Mortgage Works

With a Pledged Asset Mortgage, you won’t have to make a down payment on your mortgage loan, but you will have to use a financial investment instead. For example, if you have $30,000 in stocks, you can use that investment as collateral for the loan, without having to use a down payment. Alternatively, you can cash in the stocks and use the money for the down payment.

Pledged Asset Mortgages are generally recommended for someone in a large income tax bracket. This type of mortgage loan is a great choice if the investment used as collateral has a bigger rate of return than the interest on the loan or if the assets used can require you to pay higher taxes if you cash them in. These are also a great choice for those who wish to help a relative become a home owner, but don’t want to put down cash as a down payment. This way, you can still make a profit on your investment and the relative that you are helping will still get to become a home owner.

Pros and Cons of Pledged Asset Mortgages

The first obvious benefit of Pledged Asset Mortgages is that there is no need to pay a down payment on your loan. You get to use an investment as collateral instead of a down payment, while still generating a profit from the investment that you used. By taking out a Pledged Asset Mortgage, you can avoid paying mortgage insurance in most cases, so that’s another benefit that this type of loan will bring.

The biggest downside is that if you default on your mortgage, you will lose both the assets that were used as collateral and your home. This is especially worth taking into account if you are pledging your assets for someone else, like family of friends. Another disadvantage is that because you are not making a down payment, you will have to pay interest on the full price of the property. You can still make a profit from the investment that you are using as collateral, but your ability to trade will be limited if these investments are stocks or mutual funds.

Think long and hard before taking out a Pledged Asset Mortgage instead of making a down payment. In most cases, the cons outweigh the pros and you will only end up spending more than you should on your home. Of course, this will depend on many factors and the only person who can decide if an option is better than the other is you. Either way, the best way to come to a conclusion is to analyze both options very carefully and take all of the advantages and disadvantages into consideration.