How Much of a Down Payment Should I Make?

Posted by Jennifer Dollar on Thursday, June 5th, 2014 at 11:30am

The down payment on a mortgage loan is an important part of the process of buying a home. The more money you put down, or pay in cash for the loan, the less you will need to borrow. A down payment does more than just reduce your overall loan principal, though. It helps both the seller and the mortgage lender to know that you are a serious buyer. It can also help you to get a lower interest rate and to avoid costly fees. In short, the more money you put down, the less likely you are to walk away from your home through foreclosure or short sales. Lenders know this and encourage you to pay down as much as you can.

What Factors Affect How Much to Invest?

In some cases, you will need to pay a certain amount down on the loan. Some types of loan require a down payment. There is no maximum to pay down. In other words, there's no reason not to put down as much as you can afford to, since it drastically lowers how much you'll pay for the home through reduced interest. The following are some circumstances to keep in mind, though.

#1: Some lenders require those who put down under 20 percent of the loan to pay PMI, or private mortgage insurance. This is a fee you'll pay along with your mortgage payment for some time as a protection for the lender.

#2: Some loans, including FHA loans and VA loans have very low down payment requirements, even as little as zero. However, that doesn't mean you shouldn't pay more.

#3: The interest rate on a mortgage loan is likely to be lower with the more you put down. Mortgage lenders tend to charge more when there is more risk. With more of a down payment, there is less risk.

Other factors can affect what a lender is willing to require of a down payment. If you have a high credit score, a good loan to value ratio, and a low debt to income ratio, you may not have to pay as much. In all situations, you'll want to work with your mortgage lender to ensure you get the best possible terms for your situation. 

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