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For most first-time home buyers,
saving enough money for a down payment is a major hurdle to
owning a little piece of paradise. Traditionally, lenders
have preferred a down payment of at least 20% of the home's
purchase price. However, lenders will almost always accept
less than that if the borrower takes out private mortgage
insurance. In the last few years, innovative programs have
made it possible to put down anywhere from 0% to 3% of the
value of a home and still qualify for a mortgage.
How Much Should You Put Down?
If you've got the money, there are advantages to putting 20%
down. For one thing, you immediately have substantial equity
in your home. This may be important to you psychologically,
and that counts. In addition, you'll avoid having to pay private
mortgage insurance.
If you haven't got the money, then you'll want to learn a
little more about the private mortgage insurance mentioned
above.
Private Mortgage Insurance
(PMI)
Private mortgage insurance protects a lender in the event
that you default on the loan. Lenders generally require mortgage
insurance on loans with low down payments because experience
shows that a borrower with less than 20% invested in a house
is more likely to default on a mortgage. You're a Fool and
you're not going to do this, we know. But they don't know
it yet.
Mortgage insurance also enables lenders to grant loans that
would otherwise be considered too risky to be purchased by
third-party investors like the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac). The ability to have a market for the mortgages
means that lenders can loan more money to people like you.
The good news about insurance is that you don't have to pay
it forever. You can usually cancel it after you have at least
20% equity in the home. (Contact your loan servicer to find
out the procedure for doing this.) Typically, you'll be required
to get an appraisal on the property. This will cost money
(a few hundred dollars), but could be worth it in the long
run. If you'd like some tips on reducing your mortgage insurance,
then naturally you should click on over to our Foolish calculator
-- How can I reduce mortgage insurance costs? -- for some
help.
Some lenders may have fancy ways to allow you to avoid PMI
while still putting down less than 20%. For example, they
might offer you a second-tier mortgage to make up the difference.
The interest on the second loan will be higher, but it will
be tax deductible, whereas PMI is not. As always, it pays
to do your homework and explore as many options as you can
with your lender. |
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