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.

What is the True Cost of Refinancing? The Truth is Revealed Here!

What is the True Cost of Refinancing- The Truth is Revealed Here- 150x150Refinancing your home involves getting a new mortgage loan, and it’s a practice that can be very beneficial and save you a nice amount of money, or it can prove to be very expensive and cost you a lot of money. The main goal of refinancing is to save money on your mortgage by replacing your original mortgage loan with one that features a lower interest rate (Read: Major Motivations to Refinance a Mortgage).

Usually, refinancing costs the average home owner between 3 and 6 percent of the home loan’s value. For example, if you are refinancing a $200,000 home, refinancing will cost you between $6,000 and $12,000. Paying such a high price for refinancing should make you wonder if you should do it and get a new loan with a lower interest rate, or keep your old loan with the higher interest rate. The only way to find out if refinancing is worth the hassle and cost is by putting everything on paper and calculating if the lower interest rate of the new loan will bring greater savings than you will be spending on closing costs.

Closing Costs

All the fees associated with refinancing should be included in the Good Faith Estimate. This document will reveal how much your lender is charging you for each item. If you do your homework, you will be able to tell which fees are necessary and which ones are unnecessary and can be lowered or even waived by your lender.

Costs such as the origination fee or the lender fee are paid directly to the lender and can be easily negotiated, and sometimes even waived. The lending officer normally works on commission, and will prefer to lower these fees, than to lose a customer and get no commission at all.

When doing mortgage refinancing, you can purchase “points”, which will lower the interest rate on your mortgage. They are essentially a form of prepaid interest and each point is worth 1 percent of the loan amount. You should take into consideration the amount of time that you will be spending in the home and how long it takes you to break even on the cost when purchasing points.

Determining the True Cost of Refinancing

Lowering your interest is very attractive and the main reason why people refinance, but it’s not the only factor you should look at when deciding whether to refinance or not. The new lower interest rate should play a big part in your decision, but what you should really be looking at is whether the savings that you get from refinancing your mortgage are bigger than the cost of refinancing. Many times, borrowers will be blinded by the lower interest rates, and refinance without realizing that the high cost of refinancing will actually cause them to lose money.

In order to find out how long it will take you to start saving money after refinancing your mortgage, you should subtract your new monthly payment from your old monthly payment, and divide the cost of refinancing by the monthly savings. The number that will result from this will be the number of months it will take to break even. Refinancing if you plan on living in a home for longer than it will take you to break even is a great choice. Here are a few tips to help you understand how much will refinancing cost you and decide if it will save you money:

  • Find out what your new interest rate will be. Many times, lenders will only advertise the lowest interest rate that they can give, but that doesn’t mean you will qualify for it. Depending on your credit score and how many points you purchase, you can end up paying a much higher interest rate, which will make refinancing look less appealing than it did when it first crossed your mind to refinance.
  • Find out how much refinancing will cost you. You will, most likely, have to pay several good thousands in closing costs when refinancing, so finding out exactly how much this will cost you is a great way of determining if refinancing is a good choice. Mortgage application, origination, document preparation, appraisal, title and many other fees can add up and cost you an arm and a leg.
  • Decide if refinancing is worth the hassle. Besides the high closing cost, refinancing is also a time consuming process. Before talking to a lender, you should consult an online mortgage refinancing calculator. Online calculators won’t be 100 percent precise, but you should make sure that you provide the most accurate information when calculating your costs and savings.

Refinancing is a costly process, but you shouldn’t let that scare you. You should also not let the low interest rates advertised by