Do the Math For Your Mortgage Down Payment

Fortunately for home buyers, gone are the days when the rule of thumb “The bigger, the better” applies to putting a down payment for your home mortgage. It was a rule to live by during the boom of the real estate industry. But with the recent spate of economic problems, the brunt of which was taken by the housing industry, the rule does not apply anymore.

Instead of paying off a huge amount for your home’s down payment, you can use it for other things instead. For example, you can purchase a foreclosure home with very little down payment. The money that you should have allotted for the down payment can now be used to refurbish or remodel the home so that it would look almost brand new.

Figuring Out the Minimum Down Payment that You Should Give Out

As mentioned earlier, you can now take advantage of home loans even with zero down payment. Just remember that there are pros and cons to putting down too much down payment, and zero down payment on a loan.

Financial experts recommend using the 20% LTV or Loan-to-Value approach. For this, you will basically be considering the size of your mortgage, multiply it by 20% or 0.2, and that is the ideal down payment amount that you need to pay. With a 20% down payment, you can demonstrate to lenders that you are a credit-worthy borrower.

Naturally, the 20% rule does not apply if you are a homeowner who previously has gone through a foreclosure. Also, just because financial experts recommend that you only put down 20% of the mortgage amount as down payment, this does not necessarily mean that the lenders would look at you the same way. Lenders actually believe that a borrower who puts down anywhere from 20% to 25% down payment is more likely to default. When you are in this range, you are also not required to purchase private mortgage insurance - which will be a disadvantage to the lender.

Are you confused yet? If it turns out that putting down a 20% down payment is good for the borrower but does not appear too well in the view point of a lender - is there a midway between the two? There actually is. When you consider the costs of private insurance, you can take advantage of a low-down payment, low-interest mortgage loan - and the costs will be somehow recouped by the lender.

Another way of looking at it is by checking on the down payment required by the Federal Housing Administration. For the FHA loans that they provide for those who qualify, the down payment is set at 3.5%. If you’re not eligible for the FHA mortgage loan, you may want to apply for a federal government-initiated down payment assistance program. Your other down payment options include negotiating the deal with your lender - or having your real estate broker do it for you.

All in all, a larger down payment translates to a smaller monthly mortgage premium for you. The ‘ideal’ percentage, then, would actually depend on the individual rules enforced by the mortgage bank or the lending company.

As a homeowner, nothing beats the feeling of knowing that you have all the information that you need regarding the mortgage application process. By knowing the basics of calculating how much down payment you need, you can increase your chances of having your mortgage loan approved, and make it easier for yourself to pay off the loan several years down the line.

Rob K. Blake, refinance expert and author, educates mortgage shoppers on finding local providers by state like Alaska Mortgage Brokers and Lenders and provides reviews of national companies like America’s Servicing Company.