Your First Mortgage Concern: the Down Payment

The mortgage down payment, or "cash down" on your home is the biggest immediate expense you meet when buying a house, so it's wise to consider all your options in order to save as much money as possible now and down the road.

This section:

  • Explains how to decide on a healthy down payment amount

  • Describes how your down payment will affect other costs

  • Assesses the pros and cons of no-DP and low-DP mortgages

In the following pages we describe the elements of the mortgage package. The second section of the guide examines your credit capacity and how lenders look at the mortgage collateral.

Refer to the table of contents if you're looking for specific information.

How much to put down?

Traditional mortgages require a down payment of 20% of a home's appraised value. But these days, down payments come in a variety of sizes.

Is there any advantage to a large down payment?

The answer is (typically) yes. Putting a lot of money down now usually saves you money later on.

However, sometimes 20% is difficult or impossible. Luckily, first-time buyers and buyers on a budget now have low-DP (5%, 10%, and 15%), and even no-DP mortgage options.

And these mortgages aren't just for the cash-impaired. Some financial specialists recommend stashing your extra cash into high-returning investments (though trying to find one of those might be a trick!) rather than putting it into something that appreciates slowly, like a house. And because interest on a mortgage is tax-deductible, higher interest payments are somewhat offset by higher deductions.

So less-than-20%-down isn't all bad news. But let's take a look at some other factors that your DP affects.

Your down payment decides a lot

Like what? Almost every other aspect of your mortgage. A down payment of the full 20% means a better interest rate, lower total interest bill, faster equity-building, and no private mortgage insurance (and this is a big one).

The size of your down payment influences or controls pretty much every aspect of your mortgage package, so don't take it lightly.

American consumers love the sound of "no money down", but the option often smells sweeter than it tastes. Buyers need to be aware that, by not spending the money now, they will likely be spending more later.

On the other hand, sometimes 20% isn't feasible. and in this case, you've got options. Some good ones.

Low down payment mortgages

While these certainly aren't for everyone, they can be a big bonus for home buyers who don't have a lot of savings, but who want to buy now.

Of course, these mortgages come with a higher interest rate than their more standard counterparts, up to a few points higher.

But if you can find one that doesn't charge PMI (a big expense on mortgages with an LTV over 80%), the higher interest rate may be worth it. (In case you're not familiar with the ins-and-outs of PMI, we are covering that next.)

Eloan offers zero-money-down mortgages to good credit borrowers, and they won't charge PMI. Apply with them now, or stick with us while we finish talking about how to choose the right loan package.

(If you're a first-time home buyer, and have special needs (read: not a lot of cash), or just want to get to know the ropes a little better, read our special first-time buyer guide.)



Next: Private mortgage insurance: how to avoid it.

(Going to put down the full 20% and avoid PMI altogether? Skip ahead to our discussion of closing costs.)

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