Usually one of the most important, and expensive decisions we will make in our lives comes when it’s time to buy a home. Our next few topics will discuss the process of purchasing a home, and the importance of having enough saved for a down payment before purchasing.
Applying a sizable down payment to your home purchase is the easiest way to avoid Private Mortgage Insurance (PMI), and will ensure a lower monthly mortgage payment. PMI helps the lender avoid a loss in the event a borrower cannot continue to pay the mortgage and has to go through foreclosure. This “insurance” coverage is solely for the lender’s benefit, but is something you must pay. To avoid paying PMI on top of your mortgage payment, lenders typically require a 20% down payment.
PMI can add a significant amount to your monthly payment, and is based on the loan-to-value of your mortgage. The less you have as a down payment, the higher the PMI cost is; meaning the fee could be over 1% of the loan amount on an annual basis. For a $150,000 home, this could mean an additional payment of over $125 per month on top of your mortgage payment.
Some lenders have special programs that offer low down payment financing without PMI, but this is not always to your benefit. Even if you are able to avoid PMI without having much of a down payment, it is still beneficial to apply a down payment to your home purchase to help lower the monthly mortgage payment. In other words, something is better than nothing. This will help offset the additional costs of property taxes and homeowners insurance.
These are just some of the benefits of having a down payment when buying your home; we will discuss more next time.
By: Ross G. Allen, CFP ®