Your First Mortgage Concern: the Principal

The first thing buyers who are in the market for a new home consider is the mortgage principal. And with good reason. You'll be paying it down for over a decade, at least.

This section:

  • Describes how to decide on a healthy mortgage principal

  • Explains how lenders will look at your budget

  • Explains some special large-principal 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.

What (or who) decides your mortgage principal?

Unfortunately, not usually you. Lenders have the final say on the size of your mortgage. But, lenders aside, there are certainly some rules of thumb that you, as a borrower, should keep in mind.

First, there are the back-end and front-end ratios. These express how much of your income should go toward housing expenses in a healthy budget. Lenders use them to qualify loans, but they're very useful as personal budgeting tools as well.

But of course, these figures only give you an idea of what you can afford to spend per month on housing. To translate these estimated amounts into a principal figure, you need to look at interest rates, additional monthly costs (PMI and property insurance), and, most importantly, the length and type of your loan.
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 a down payment of 20% is difficult or impossible. Luckily, first-time buyers and buyers on a budget 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.

(If you need to factor investments and tax deductions into your decision, it's probably a good idea to talk to an accountant. Or, for die-hard do-it-yourselfers, we have a very precise mortgage calculator that can help a lot.)

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 are likely to spend more later.

On the other hand, sometimes 20% isn't feasible. 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 (and are financially secure).

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'll be covering that in this section.)

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.



Next: Interest Rates: how you can control them.

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