Do You Need to Pay 20% Down on a Home Loan?
20% down payments are recommended on conventional mortgages where the borrower is trying to avoid paying private mortgage insurance, but in cases where a first-time home buyer is working with a budget and trying to avoid paying more up front, an FHA home loan and its’ low 3.5% down payment requirement can be an important option to consider.
FHA home loans require a mortgage insurance premium. The up-front portion of this may be financed into the home loan in its’ entirety or paid in full with cash depending on the borrower’s needs.
And while most FHA mortgage insurance will last either 11 years or the lifetime of the loan depending on the LTV and other factors, a 20% down payment for an FHA mortgage is simply not required.
Some borrowers make a larger down payment to avoid private mortgage insurance, but also in cases where their credit scores are lower than the lender’s requirements. The larger down payment is considered a compensating factor.
When Do Lower Home Loan Down Payments Make Sense?
Paying more money down means your home loan costs less over the lifetime of the mortgage due to interest rate charges. If you plan to own your home for the full term of the loan, a larger down payment may be a smart thing to consider if you want to save money over the full loan term.
But if you plan to sell the house before the loan term is over, and know you won’t be in the home ten years from now, a lower down payment may be best.
Buying Discount Points to Lower Your Interest Rate
The same rules apply for purchasing discount points to lower your interest rate. If you don’t plan to keep the home long term, you may want to think about saving that money for later. Lower rates mean more when you are paying longer on the mortgage.
Those who are unsure of their plans for the home in later years should talk to the lender about the size of the down payment and see what makes sense.
If you choose to make the minimum down payment in order to save money up front, know that an FHA mortgage loan can be refinanced into an FHA Streamline Refinance loan with the option of a lower interest rate, lower monthly payment, or some other tangible benefit to the borrower.
There is more than one way to save on an FHA mortgage loan if you know how to use these loans.
FHA Loans Have Eligibility Requirements
The U.S. Government Backs Mortgages Through the FHA
Financed Properties Must Meet FHA Minimum Standards
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