When you are in the market to purchase a home, one of the first things you will need to determine is how much of a down payment you will have to place on the property.
This applies to any type of home, loft, condo, or townhome that is used for your main residence. Second homes and commercial properties have different requirements for down payments.
Type Of Mortgage You Are Going To Use Can Impact Down Payment
The type of mortgage that you get will impact the amount of your down payment. Different loan programs have different requirements, some of which are required by laws that were enacted after the financial crisis in 2008.
Conventional Loans
Conventional mortgages offer the best interest rates and are usually available for the longest terms. You can apply for 10, 15, 30 and 40 year conventional mortgages. A conventional loan will require you to place a minimum of 20 percent down on your home. A $200,000 home would require a $40,000 down payment. However, this large of a down payment will give you instant equity in your home and significantly reduce the interest payments that you will make over the life of the loan.
Adjustable Rate Mortgages (ARM’s)
An adjustable rate mortgage can have down payment requirements as low as five percent. Some loans are even being offered at 3.5 percent. This type of loan usually has low payments for the first one to five years, then the interest adjusts and the payments become higher. This type of loan is usually preferred by someone who does not plan to remain in a home for an extended period of time.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac loans are guaranteed loans through the use of mortgage insurance. These federally backed loan programs will allow down payments to be as low as three percent for first time home buyers. In addition to this low down payment, Fannie Mae and Freddie Mac will allow the down payment money to come from a monetary gift. (Many loans require that the down payment is from the savings of the buyer.) These loan programs offer very competitive interest rates. However, buyers are required to carry mortgage insurance as a guarantee on the loan. This is an additional premium added to the mortgage payment.
FHA Loans
The Federal Housing Authority offers a mortgage insurance program that guarantees loans for first time home buyers. Down payments are generally 3.5 percent for all buyers. Those with credit scores under 580 can still qualify for the program, but will require a larger down payment. Similar to Fannie Mae and Freddie Mac, this loan program also has a separate mortgage insurance payment.
VA Loans
You may qualify for a VA loan if you are on active duty or are a military veteran. In this case you will not have to pay any money down. You should contact a VA loan specialist to make sure the paperwork is handled correctly and that you get the best interest rate available.
Additional Down Payment Information
It is important to remember that larger down payments reduce the overall debt on the home. You can save thousands of dollars in interest payments over the course of the loan by using a larger down payment. Additionally, larger down payments also help secure lower interest rates. Lenders feel more comfortable dropping interest rates on homes that already have equity established in the home.
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