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Put Your Money Where Your House Is


In addition to avoiding costly Private Mortgage Insurance (PMI) and lowering your total house payment; having a down payment available when purchasing a home may qualify you for a lower interest rate and provide the comfort of built-in equity.
Not only do lenders use PMI to help lower their risk when taking on a high loan-to-value mortgage, they can also charge a higher interest rate on the actual loan. This doesn’t necessarily mean you have to scrape together every penny of savings you have to qualify for the lowest possible interest rate, but there could be a substantial difference in your interest rate with no down payment as opposed to a 5-10% down payment.
By saving ahead of time, you will also benefit from having some equity established in your home. Ideally, your home’s value will appreciate in the long run through market increases and any improvements you make. Having a cushion in the event that home values decrease will help you avoid the stress of potentially having to part ways with your home at a time when you owe more than it is worth. (This is also referred to as being “upside down” in your home.)
The benefits of having a down payment are abundant. Now that we have covered them in detail, we will discuss what type of mortgage (Fixed Rate or Adjustable Rate) may benefit you the most.
By: Ross G. Allen, CFP ®