Applying For A Home Mortgage

01/17/09

For most people, raising the money for the 20 percent down payment that is typically paid on the purchase of a home doesn't come easy. The good news is that there are quite a few low down payment mortgages available nowadays. When deciding on a mortgage plan to go for however, you should determine if 20 percent is indeed the standard rate.

The fact is that most mortgage lenders do require you to make the 20 percent down payment at the minimum. If you cannot manage to make the 20 percent down payment, you will probably be required to purchase Private Mortgage Insurance or PMI. The cost of PMI is usually equivalent to one half of 1 percent of the selling price of the property, and is intended to protect the mortgage company if you are unable to pay back the loan. Your overall mortgage costs will therefore be less if you come up with 20 percent down and can avoid having to pay PMI.

What if you put down less than 20 percent? If you are unable to make the 20 percent down payment, purchasing PMI may be your next best option. The good news is that you may be able to get the mortgage lender to cancel PMI when you attain 22 percent equity in your home, or even 20 percent equity if you have a good record of making payments.

Another option available to you is securing an 80/10/10 loan. It enables you to avoid PMI by financing half of the required 20 percent down payment with a second mortgage. The way it works is that 80 percent of the purchase price of a home is financed through a first mortgage, 10 percent through a second mortgage, with the final 10 percent coming from the down payment. You may also pay off the 20 percent down payment with an FHA loan that you secure from the government. This last alternative will still require you to pay for insurance, but in most cases a down payment of as little as 3 percent will suffice.

What about the possibility of purchasing your home without having to make any down payment at all? It is possible to finance 100 percent of the purchase price of a home with a mortgage that requires no down payment at all. The disadvantage of this type of financing is that you are likely to be charged a higher interest rate than that of a standard mortgage. This means your monthly mortgage payment will be higher. Furthermore, you will still be required to purchase PMI since you were not able to pay the required 20 percent down payment.

Let's review the options. When trying to determine how much to put into the down payment, you should explore your various options in order to find a plan that will best suit your circumstances.

Q: Are you interested in gaining equity as soon as possible and thereby decrease your monthly costs? A: Then putting down 20 percent may be best for you.

Q: Are you unable to come up with a 20 percent down payment but want to avoid paying PMI? An 80/10/10 loan may then be your best option.

Q: Can you only come up with a 3 percent or 5 percent down payment and don't want to wait to buy a home because you are concerned about rising house prices? A: Maybe a government insured FHA loan would be a good answer.

Are you unable to raise enough money for any down payment but are willing to incur the extra expense of a no down payment mortgage plan? You may be able to do this if you are fully confident in your ability to make the payments and to secure a better mortgage plan later on down the line. The important thing is to evaluate your own situation carefully before you decide how much to put down on a home.