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As a Loan Officer, one of the things that really surprises me hearing from my Clients is their belief that they need to put up 20% down payment in purchasing a home. Believe me, this is a thing in the past.
Prior to 1956, as the story goes, banks usually require 20% down payment to potential home buyers to protect themselves if the Borrowers default on their payments.
However, home values sky rocketed over the years and the 20% down payment has become a burden to home buyers.
Today, down payment usually ranges from 0 – 20% depending on the loan product that the Borrower is eligible for.
Below is a table that shows the usual loan types and their corresponding down payments.
Again, each loan type has its own unique requirements so consult your Loan Officer before making a decision.
| Type of Loan | Down Payment |
|---|---|
| Conventional Loan | 3.0 - 20.0% |
| FHA Loan | 3.5% |
| VA / USDA Loan | 0% |
| Jumbo Loan | 20% |
Advantages of Paying Higher Down Payment
If you are putting up a down payment less than 20% of the price of a home, Lenders will require an added insurance policy that will protect them if you cannot pay for your mortgage. We call this the Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premium (MIP) for FHA Loans. VA Loans do not require this insurance premium.
With conventional loans, PMI will be cancelled once you reach the 20% and this results to a lower monthly payment. That is why some Buyers choose to put up 20% down payment if their financial status enables them to do it.
This principle is also the reason why Borrowers with FHA Loans, upon reaching an equity of 20% of their property value, they choose to refinance with a conventional loan thus removing the MIP from their monthly mortgage.
Another reason why some Buyers put down more cash up front is to decrease the principal amount that they owe thereby lowering their monthly payment. Below is a sample computation of two loans with same purchase price, same interest rate but different down payment amounts.
| 5% Down Payment (DP) | 20% Down Payment (DP) | |
|---|---|---|
| Purchase Price | $635,000 | $635,000 |
| Down Payment | $31,750 | $127,000 |
| Loan Amount | $603,250 | $508,000 |
| Mortgage Term | 30 Years Fixed | 30 Years Fixed |
| Interest Rate | 5% | 5% |
| Monthly Mortgage(Principal+Interest) | $3,238.38 | $2,727.05 |
| Private Mortgage Insurance (PMI) | $221.19 | $0 |
| TOTAL Monthly Mortgage(Principal+Interest+PMI) | $3,459.57 | $2,727.05 |
You may want to take note that aside from the lower Principal and Interest payment for the one with 20% DP, it also comes with $0 PMI saving the Buyer a total of $732.52 on monthly mortgage.
In securing a loan, you are the best person who can decide in which aspect you would like to save. Some people prefer a lower down payment but with higher monthly mortgage while others prefer to put up higher down payment to get a lower monthly mortgage.
Consult with your Loan Officer about your options.
