For many homebuyers, figuring out the details of financing their purchase can be a daunting task. After all, a home is likely the largest purchase a person makes in their lifetime. One of the decisions to be made is whether to go with a standard or low down payment mortgage.

Tim McLaughlin, a senior vice president for Weichert Financial Services, offers these tips:

• Amount of Cash On Hand and In Reserve. Standard mortgages require at least a 20 percent down payment, while with an FHA loan you can put down as little as 3.5 percent of the purchase price. If you go with a low down payment loan, you don’t have to invest as much of your money and can keep money in reserve to invest or to use for home improvements.

• Private Mortgage Insurance. One of the drawbacks of a low down payment loan is that you will be required to obtain private mortgage insurance. This is a type of insurance that protects the lender against the possibility of you defaulting on the mortgage. It will add money to your monthly payment, but can be removed once the balance on your mortgage is less than 80 percent of the home’s purchase price.

• Interest Rate. Many times, lenders offer a lower interest rate to borrowers who make larger down payments. Homebuyers need to weigh the cost of putting a small amount of money down, since monthly payments can be more if interest rates are higher.

Tim McLaughlin, VP Weichert Financial Services

Getting a low down payment mortgage can provide you with a means to purchase a home without coming up with a large amount of money upfront. While this type of mortgage can be beneficial, there are a few potential drawbacks that you will need to know about to analyze if putting more money down is right for you. Here are a few things to consider about low down payment mortgages.

Low Down Payment

With a standard mortgage without mortgage insurance, you are going to have to come up with at least 20% of the purchase price out of your pocket. This can be a very significant investment for first time homebuyers or when you get into more expensive homes. When you opt to go with a low down payment mortgage, you will be able to invest a lot less of your own money. For example, with an FHA loan, you can put down as little as 3.5% of the purchase price.

Keep Reserves

The biggest benefit of getting this type of mortgage is that you are going to be able to hold onto your cash reserves. When you put a substantial amount of money down, this is going to cut into the amount of savings that you have. Being able to have a large amount of money in savings is going to be beneficial in a number of different ways. You will have capital available to invest, to furnish your home, for emergencies, and with higher reserves, that will also help in the qualification process.

Private Mortgage Insurance

One of the drawbacks of getting a low down payment mortgage is that you are going to have to obtain private mortgage insurance. Private mortgage insurance is a type of insurance that you must pay in lieu of putting 20% down. The investor is going to require this in order to insure themselves against the possibility of you defaulting on the mortgage. If you default on the mortgage, the private mortgage insurance company is going to pay the lender a part of the balance that is owed. Private mortgage insurance is going to add money to your monthly payment, however, once your loan to value reduces to 77.5%, via appreciation or via principal reduction, the mortgage insurance may be removed.

Interest Rate

Something else that you will want to take into consideration is the interest rate. Many times, lenders are going to give you a lower interest rate when you make a larger down payment. Therefore, you are going to have to decide whether putting a small amount of money down is going to be in your best interest in the long run. If your interest rate is higher, your monthly payment may increase.

Making the Decision

If you can get a low interest rate and the private mortgage insurance is not too unbearable for you, getting a low down payment mortgage can be beneficial. Just make sure that you are not going to be paying too much money overall so you can avoid paying extra upfront. Need help analyzing? Ask us how!

Historically low-interest rates and attractive home prices have combined to make the current housing market one of the most affordable in decades.  While patience can sometimes be a virtue, for those who think a home purchase is in their near future, waiting just doesn’t make cents.

Figures from the National Association of Realtors shows the favorable gains that recent first-time buyers have enjoyed in housing affordability.

The average sale price of a typical starter home dropped nearly 24 percent from 2007 to 2010. That equates to a savings of $40,000 on the purchase of a home.

The same report shows that interest rates dropped from approximately 6.5 percent to under 5 percent to make a home purchase even more affordable. As a result, a first-time buyer’s monthly payment dropped nearly $400 from $1,083 to $709 and the income needed to qualify to purchase a starter home dropped from $52,000 in 2007 to $34,000 today.

While holding off on buying might have been a good strategy a few years ago, today’s market conditions are just too favorable to wait for a better opportunity that isn’t likely to come.

With home prices appearing to now stabilize or increase in many markets, and with signs pointing to interest rates on the rise, it seems likely that a home purchase will cost more in the future than it does today.

For example, the monthly payment to purchase a $300,000 home with 10 percent down and a 30-year fixed mortgage at an interest rate of 5 percent would cost $1,449.  Yet, if rates rise to 6 percent and home prices increase 5 percent, that same purchase would end up costing an additional $3,000 a year.

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