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The down payment on your mortgage

The down payment on your mortgage will almost certainly be the single largest one-time expense over the life of your loan; deciding how much to put down will be key to future savings as well as to the health of your mortgage.

This page:

• Explains how the down payment affects interest rate and costs

• Helps you decide what size down payment is right for you

In the following pages, we'll look at private mortgage insurance (PMI), one time closing costs, and recurring costs.

If you missed it, the first part of this Mortgage Basics guide explained what a mortgage is, how interest rates are set, and how the differences between various mortgage types affect you.

Your down payment: how much should you pay?

The down payment is, very simply, the cash you put toward your home at the time of purchase.

Traditionally, lenders have required that a new home owner put at least 20% of the home's value down at closing, but standards are much more relaxed now. A 10% down payment is considered very normal, although the lender will then require that you pay private mortgage insurance until you've paid for 20% of the home. (We'll discuss this pesky part of the loan package next.)

Today even 5% down is fairly common (with insurance), although a very low down payment like this limits the total size of the mortgage. A few lenders offer mortgages for even less money down, but usually the interest rates on these are so high that any advantage of putting no money down is soon lost. We don't recommend taking out a mortgage on a less than 5% down payment.

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Usually, the decision about how much to put down can be finalized later in the application process, after other factors are accounted for. If your credit score is at least 620 you can get pre-qualified at Eloan in minutes, or if your credit is shaky visit FullSpetcrum Lending and find out what interest and discounts you qualify for, and than decide on your down payment.

Are there advantages to making a large down payment?

Certainly. More money down usually means a lower interest rate and, of course, there is the added benefit of having to borrow less (and therefore paying far less in interest).

Home buyers planning to stay in their home for a while usually benefit from making a healthy down payment; thereby lowering their interest bill and avoiding mortgage insurance.

A larger down payment may also means that you'll qualify for a bigger loan, because lenders see you as less likely to default if you've already put a lot of money into your investment.

Are there benefits to a low down payment?

Obviously, having to come up with less cash is a big one. If you see your house as primarily an investment (especially a short-term one) you might want to have the immediate leverage (meaning assets per cost to you) that little money down provides, especially if you don't plan on paying the higher interest rate for long.

It can also be pretty difficult for first-time home-buyers to come up with enough cash for a large down payment. In this case, putting down what you can and taking out a higher-interest loan may be the only option. Once you build enough equity, you'll probably be able to refinance, or if you end up moving again, your equity can be put toward the new down payment.

One aside: large down payments, especially when made by first-time home buyers, are often a little suspect to lenders. Most will ask if any part of the down payment is a gift or a personal loan, and they may charge a higher interest rate on the mortgage if it is (figuring you're at greater risk of defaulting on the loan if it's not your hard-earned money up front).

Other lenders will allow gifts from immediate family (like parents) without penalty, but they may require documentation (like a signed letter) indicating that the money is indeed a gift, and is not expected to be repaid.

For a more in-depth look at the factors affecting the size of your mortgage, visit our guide to choosing the right mortgage.

Next: Private mortgage insurance: what it is, and how to avoid it.

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