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Low Down Payment Purchase Options

For some home buyers the decision of how much money to use as a down payment can be very confusing and a difficult one to make.

The best route for each buyer or investor really does depend on their situation and personal preferences.  The summary below reviews four issues that all home buyers and investors should consider about down payment:

  • Down payment options
  • Cost of lower down payments
  • Benefits of lower down payments
  • Personal considerations

The information provided below is for the purpose of provoking thought and careful consideration about different financing programs available.  It is not meant to steer you toward one particular program.  It is merely an exposition of the options to consider when purchasing a home or investment property.

Down Payment Options

The “Down Payment Requirements” chapter reviews the minimum down payment needed for conventional loans (Fannie Mae & Freddie Mac), as well as some of the available alternatives with non-conventional (FHA & Portfolio loans) programs.

For example, you can purchase a single-family home or condominium with as little as a 1.0% down payment.  But there is a price for lower down payment: mortgage insurance (often called PMI, aka private mortgage insurance).

Mortgage insurance is required when the loan amount is MORE than 80% of the purchase price (practical translation: down payment is less than 20%).  Also, the lower the down payment the higher the mortgage insurance premium charged.

Military veterans who qualify for a VA loan have the easiest route to buying a home, with the need for NO money down.  VA loans can provide up to 100% financing for qualified military personnel and veterans and requires NO monthly mortgage insurance premium.

The bottom line is that regardless of your credit and income situation, you actually have different down payment options to purchase a home.

Cost of a Lower Down Payment

Low or no down payment programs have two primary costs:

  • Higher interest rates
  • Higher mortgage insurance premiums.

The downside of a small down payment, whether you are using a conforming loan or a non-conforming program, is that you will need to pay higher interest rates and mortgage insurance charges when compared to a larger down payment.

Mortgage insurance is calculated against the loan amount, so you get hit with a double-whammy.  The lower down payment means a higher loan amount and a higher mortgage insurance charge.

Mortgage insurance can be removed once sufficient equity is produced.  So if the property shows at least 20% equity in a few years, or if you pay down your mortgage balance to 80% of the original purchase price, the mortgage insurance can at a minimum be refinanced away.

A related burden of lower down payments is obviously higher loan amounts, which translates into higher monthly payments.

Consider, for example, the purchase of a $100,000 condominium with market interest rates of 6.500%.

  • With a 5% down payment, the loan of $95,000 would have monthly payments of $600.46.
  • However, a 10% down payment would decrease the loan amount to $90,000 and the payment to only $568.86 per month.

During the first few years of a mortgage loan the bulk of your monthly payments are for interest, which is normally tax-deductible.  So you actually get a bit of your monthly payments back at the end of the year in the form of tax deductions.

Benefits of Lower Down Payments

Though the disadvantages of low down payments seem serious, there are also advantages.  Take time to weigh the two and assess which is the best for you.

The chief benefits of lower down payment include the following:

  • You are able to become a homeowner.
  • Increased liquidity.
  • Higher rate of return.  Your property’s appreciation will be the same whether you put 1%, 3%, 5% or 20% down payment.  In fact, your rate of return actually decreases as you make a larger down payment, as discussed below.
  • Opportunity cost.  In some cases, the smart investor can make more money from available cash by placing it in other investments.

Personal Consideration

How much to put down should be carefully thought out.  You must make your own personal calculation, of the monthly payment that you can afford.  Our mortgage bankers will qualify you for a certain level based on your income and debt.  But that qualification level is often different from the level that you feel comfortable with.

Your income may qualify for a monthly mortgage payment of $1,500; however you may feel that you can realistically afford only $1,200 per month.  If that is the case you must lower the loan amount by increasing the down payment or finding a less expensive property.

Consult with your loan officer about what’s best for you, as well as ways to eliminate or minimize mortgage insurance costs.

Working with J&J Coastal Lending

  • We put YOU first.
  • J&J Coastal Lending offers some of the most competitive rates in all of California!
  • Fast and efficient, we close most of our loans in 27 days or less.
  • We offer a variety of loan programs, including portfolio lending options. J&J Coastal Lending will find the loan that is right for you!!!
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