1. Money

A Down Payment for Your Home Purchase is More Important Than Ever

By July 7, 2008

Follow me on:

In recent years, almost anyone could get a mortgage with very little or even no money down. Lending standards were quite relaxed and this made it affordable for many people to buy the home of their dreams. Unfortunately, times have changed. The looming credit crunch has forced banks to tighten their belts and make it harder to obtain a loan.

For most people, this means a significant down payment is required. The days where a person with average credit could walk into a bank and get a loan with zero down are gone. Now, you will need a higher credit rating to be approved for that same loan, and in most cases, also be required to put upwards of 20% down. That isn't to say that there aren't opportunities out there for little or no money down loans, but you'll need significantly better credit to obtain this kind of financing.

There Are Benefits to Putting Money Down

While it may seem like a painstaking process to set aside tens of thousands of dollars to put down on your new home, it does come with many advantages. First, it is instant equity. If you put $40,000 down on a $200,000 house, you already have equity. When the home increases in value, that just means you build even more equity on top of it. But more importantly, in a down market, you also have that equity as some protection against getting upside down on your mortgage. If your home was valued at $200,000 at the time of purchase, but a year later drops to $190,000, you're still in a good position because you only had to borrow $160,000.

The second good reason to put down a 20% down payment is that you can avoid Private Mortgage Insurance, or PMI. Most lenders require PMI to be applied to loans that don't have a sufficient down payment, and this can result in a higher monthly payment. This puts more money in your pocket each month.

And finally, the obvious reason a down payment is a good idea is simply because you have to borrow less money. The less you borrow, the less interest you'll pay over the life of the loan. Depending on what the rate is and how long you stay in the home, just applying a sizable down payment can shave tens of thousands off the total cost of the home.

Find Out How Much Home You Can Afford

The biggest challenge when purchasing a home is determining how much home you can comfortably afford. If you overextend yourself by borrowing more than you need with little or no money down, when the market is soft like it is today, you can be one of the many people who are in a very tight financial situation right now. But if you plan accordingly and buy only as much house as you can reasonably afford with a decent down payment, you will be able to withstand temporary economic downturns.
Comments
Comments are closed for this post.
Leave a Comment

Line and paragraph breaks are automatic. Some HTML allowed: <a href="" title="">, <b>, <i>, <strike>

©2014 About.com. All rights reserved.