HOW MUCH DOWN?

How Much Should You Put Down ?

When you're considering buying a home, the amount of your down payment plays an important role. A down payment is a percentage of your home's purchase price that you pay up front when you close your home loan. Lenders often look at this down payment amount as your investment in the home, so it plays an important role.

Not only will it affect how much you'll need to borrow, it can also influence whether your lender will require you to pay for private mortgage insurance.

Because your down payment represents your investment in the home, you lender will often offer you a lower interest rate if you can make a higher down payment.

Loan-to-value ratio

The amount of your down payment helps give your lender the property's loan to value ratio. LTV is one of the main factors that a lender considers when deciding whether or not to extend you credit.

Your loan-to-value ratio expresses how much you will owe on the home after down payment. In other words, it's a percentage that shows the ratio between your home's unpaid principal balance the purchase price. The higher your down payment, the lower your loan amount will be and the lower yout loan-to-value ratio will be.

Private mortgage insurance

For conventional financing, if your down payment is lower than 20%, your loan-to-value ratio will be higher than 80%. In that case, your lender may require you to pay private mortgage insurance, because thay are lending you more money to purchase the home and increasing their potential risk of loss if the loan should go into default. Keep in mind that private mortgage insurance will increase your monthly payment.

When you consider how much to put down on your home, think about your lender's requirements and what a higher or a lower payment will mean for you. Is it worth it to you to pay private mortgage insurance each month in order to receive the other benefits of homeownership? Or would it make more sense for you to save for a larger down payment and avoid PMI, even if that means waiting longer to buy a home? Knowing the impact of each choice can help you make your decision with confidence.