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There are a number of financial factors home buyers must prepare for if they want to qualify for a mortgage loan. You will benefit from a higher credit score, strong employment history and lower existing debt. Having all these things in order will help you qualify for a lower mortgage rate. The other major factor to consider is how much money you are able to apply toward your mortgage down payment.
What is a Mortgage Down Payment?
The purpose of your down payment is pretty simple. You are paying down a portion of your home loan immediately. This means you will owe less principal over the life of the loan. Principal is the amount you are actually borrowing. The rest of your monthly mortgage payments will be the interest you are paying to the bank/lender, as well as some additional fees attached to the loan. You may also be paying some mortgage insurance, which is a topic we will cover later in this article.
Let’s say you are buying a house in the Atlanta area for $400,000. You are able to put $40,000 down as your upfront down payment. That equates to 10% of the principal value of the loan. The remainder of your 30-year mortgage will be amortized to pay off the remaining $360,000. Amortization is a payment schedule determined by the mortgage lender. Early on in your loan, you will be paying more interest than principal with each monthly mortgage payment.
By the very end of the loan (30 years from now), your payments will be mostly principal. The interest is weighted upfront to protect the lender in case you default on your loan or sell your house before the 30 years come to fruition.
Can I Pay Off My Mortgage Early?
You almost always have the option to pay off your home loan early or apply extra principal with any monthly mortgage payment. Say you got a $1,000 Christmas bonus and want to put it to good use. Send an extra $1,000 with your January mortgage payment and note that it should be applied toward the principal amount. You will have then paid down the principal of your mortgage by an additional $1,000, which may save you on payments at the very end of your loan.
Any additional payments made will not affect upcoming mortgage payments. The same amount will always be due each month no matter what you paid the previous month. You’re just paying extra now to save some interest later.
How Much Down Payment Should I Make?
If you are planning to buy a home, you will want to try and save up as much for your mortgage down payment as possible. It can help you qualify for a lower interest rate and, as we discussed, will lower your total overall principal owed on the loan.
Most mortgage lenders will recommend having a down payment of at least 20% of the loan value, if you can afford it. So, for that $400,000 house we were talking about earlier, the ideal down payment would be at least $80,000. This will put you in the best position as a borrower, especially if you have strong credit, a steady income and fewer other debts.
Some conventional mortgage loans may require a down payment as low as 3%. FHA loans require a down payment of at least 3.5%. USDA loans and VA mortgage loans can allow you to buy a home with no down payment whatsoever. Even if you qualify for one of these programs, it is still recommended to put down as much as you can afford because it will benefit you in the long run.
Mortgage Insurance
For any home loan where you have a down payment of less than 20%, you will typically be subject to paying private mortgage insurance (PMI) or a mortgage insurance premium (MIP) each month on top of your standard monthly mortgage principal and interest payments. PMI fees can range from 0.5% to 2% of your loan balance per year. These premiums will be extra fees you are paying to protect yourself and the lender from a loan default.
The bank is taking more of a risk to lend to you because you have a lower down payment, so this is basically the “safety net” cost to allow you to qualify for a mortgage loan. Though it will add to your monthly payments for a while (usually until you have paid off at least 20% of the original loan amount), it is generally worth it if it helps you get a home loan.
Down Payment Assistance in Atlanta
If you are buying a home, but don’t have a lot of money saved up for a big down payment, the first priority should be looking into loan programs like FHA or USDA that allow you to have a lower down payment and still qualify. There are also down payment assistance programs you may be eligible for based on your income or other factors. You may be able to acquire a second loan to cover your down payment.
Just understand this means you are carrying a second loan right off the bat, or you are rolling more into your primary mortgage loan amount. You are borrowing more and creating a bigger financial burden. Just make sure you can keep up with payments to avoid defaulting on either loan and potentially losing your property. A down payment loan is typically not recommended unless it’s your only option.
The right down payment will depend on a number of factors. First, you have to consider the price of the home you are wanting to buy and what those monthly mortgage payments will be. Then, you want to apply as much as you can afford toward your down payment. It is best to talk with your mortgage lender. See what mortgage loan programs you might qualify for and get detailed breakdowns of your potential payment schedule.
Buying a home is a major purchase and a huge financial commitment. Don’t go it alone.
If you are buying a home in the Atlanta area, contact Moreira Team | MortgageRight today to get started. We’ll be happy to answer any questions you have and figure out the best down payment and loan program for your financial situation.