Down Payments & PMI

Down payments when buying a home are more important than ever. The days of the no-money-down real estate purchases are behind us and mortgage loans are more difficult to obtain than they have been in decades. While there are a few creative financing options, most of the time those options will cost you a lot more in terms of interest and closing costs, plus they are not easy to qualify for. Experts recommend that you have at least 20% of the sales price of the home to put as a down payment and more is better.

The down payment does two things for the homeowner immediately. First, it reduces the amount of the mortgage needed, therefore reducing the total amount paid for the home, particularly in terms of interest. Second, a hefty down payment gives the buyer instant equity, assuming they are not paying more than the home is actually appraised at. Equity allows for the ability to obtain loans or lines of credit in times of need, such as for renovations or upgrades to the property.

For those who do not come up with a down payment of at least 20%, if you qualify for another financing option you will end up having to pay PMI, or private mortgage insurance. PMI is obtained by the lender and the cost is usually added directly to your monthly mortgage payment. The cost averages around .5% of the cost of the home. As it sounds, PMI is insurance for the lender so that if you should default on your mortgage, they will not be out the money still owed to them.