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Mortgage advice: How much down payment do you need?

October 08, 2008

As you are shopping for a new home mortgage, it is important for you to keep in mind how much of a down payment you have available and what your lender will require from you.

Higher down payment equals lower mortgage payments

Since lenders base the mortgage rates they offer on the risk factors to them for your transaction, the more down payment you provide, the lower your interest rate and mortgage payment could be. For the lowest rates and payments, most lenders prefer a 20 percent down payment.

Less than 20 percent down payment

If you have less than a 20 percent down payment, you can still buy a home.  There are other options available to you. One option is combining a first and second mortgage. In this instance, you would get a first mortgage for 80 percent of value of the home and a second mortgage for the amount you need to supplement the funds needed for a 20 percent down payment.

If you don't want a first and second, some lenders may allow you to do one large first mortgage instead, but keep in mind that you may be required to pay for mortgage insurance by your lender. Since these mortgage scenarios represent a higher risk, your lender may charge you a higher interest rate.  

100 percent financing

A mortgage at 100 percent financing has no down payment required, but you must pay the closing costs of the loan. Interest rates are often higher for this purchase option, causing higher mortgage payments. Lenders also have more stringent requirements for qualifying for this mortgage option.

There are many mortgage programs and down-payment options that may be available to you. As you are shopping for your mortgage, make sure your lender lets you know the differences in interest rate and monthly payments for each option available so you can make an informed decision.

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