02 Apr Fairway Can Help You Determine How Much Money To Put Down On a Home
First time homebuyers might wonder how much money you should put down when buying a home. Is the best plan to put down 20% to avoid PMI or is your money better saved on the down payment and spent elsewhere?
By putting 20% down, you will be able to get the lowest home loan interest rate. Often when you pay a smaller down payment, there can be rate add-ons leaving you with a higher home loan interest rate. Also, you wont have to pay Private Mortgage Insurance (PMI). PMI protects the lender in the event of a mortgage default however, it does not protect the buyer and only allows the buyer to put down less than the 20% down payment.
With the lowest home mortgage interest rate on a lower loan amount and no PMI, your house will be much more affordable and you will have lower payments. By putting 20% down you also have the availability to choose whether or not you want to have an Escrow account. (Escrows are payments added to your mortgage each month covering 1/12th of the property taxes and insurance.) While some people prefer to pay the taxes and insurance themselves once a year, when you put less than 20% down, mortgage lenders require that you have an Escrow account on your home loan. If you choose to put down 20% this becomes only a personal choice for those who like to control those payments.
Even with the above reasons of why you should, there are definitely reasons for when you should not put down 20%. Simply, if you don’t have it, you don’t have it. If you only have 3-5% to put down that should not be a deterrent from buying a home. If you find that you would be spending all of your money trying to put together 20% just to avoid PMI, don’t drain all of your savings. It is more important to have that “rainy day” emergency fund in the event the home purchase or move does not go exactly as planned.
If you still have other more expensive debt such as car loans, student loans, or credit cards, it would be better to not put down 20% but instead borrow money for a mortgage at 3-6%. Even with the extra cost of PMI, you could have a manageable mortgage payment and use the extra savings to pay off your other higher debt. Also, for many people, home mortgage interest and PMI is tax deductible while credit card or auto loan debt is never tax deductible.
So as a first time homebuyer, if you still find yourself unsure how to approach your home mortgage loans and wondering how much money you should put down, contact Fairway Independent Mortgage of the Carolinas to help answer any of your questions. Our skilled mortgage planners will sit down and create a strategy with all of your financial goals in mind and find the right home loan for you.