Down Payment
The down payment is the initial upfront payment made when purchasing a property, expressed as a percentage of the purchase price. It represents your investment in the mortgage, as you risk losing this amount if you default on your monthly payments.
The size of your down payment can impact various aspects of your mortgage:
- Mortgage Type: Knowing how much you can afford to put down can help you determine whether a fixed-rate or adjustable-rate mortgage may be more advantageous for you.
- Private Mortgage Insurance (PMI): If your down payment is below a certain threshold, your lender may require you to pay for private mortgage insurance to protect them in case of default.
- Interest Rate: Generally, a larger down payment results in a lower interest rate, while a smaller down payment can lead to a higher interest rate.
Different lenders have varying minimum requirements for down payments. For conventional loans, lenders typically expect a down payment between 5 and 20 percent of the purchase price. Many first-time homebuyers find it challenging to afford such a substantial amount. In these situations, FHA loans are an appealing option, as they require a minimum down payment of just 3.5%, regardless of the state in which the buyer resides.
