The bigger down payment you put down, the less interest you will have to pay over the life of the loan. You will also not have to deal with private mortgage insurance if you can make a 20% down payment. However, getting into a mortgage with a lower down payment can still be a good deal.
If someone is willing to give you a portion of your down payment, congratulations! There are a few rules that will make this easy to track at closing time. First of all, the gift needs to come with a formal gift letter confirming it's not actually a loan in disguise. The gift can only be 6% of your down payment, so you will still need to come up with some savings.
Mortgages with Lower Down Payments
The larger your down payment, the more equity you have at purchase and you will be able to get lower interest rates. However, you can still get a great house with a smaller down payment. Some jumbo loans allow a 5% - 10% down payment instead of the commonly touted 20% requirement. Understand that this will mean making larger payments for a longer period of time and paying private mortgage insurance (PMI) until you can get the loan under 80% of the value of the house. However, if you can buy the least expensive house in the best neighborhood, it's likely your equity will increase quickly.
Plan to Refinance
Once you've found your house and qualified for your mortgage, it's a good idea to set some new financial goals. Oftentimes, buyers find that their expenses actually go down once they purchase and they are able to both save a bit more money and build up equity. Cautious optimism is a good financial habit to practice once you've purchased your home. Be diligent about saving for emergencies. If you find you are able to make a larger monthly mortgage payment, consider refinancing to a 15-year loan by simply refinancing the remaining debt without taking any cash out of the house. Making an additional payment on the principal every month is also a great way to reduce the term of your mortgage.
Home ownership is often a way to get your foot in the doorway of financial security. Once inside, you can build wealth by building equity in your purchase. A fully paid for house is one of the best gifts you can give yourself in the future.
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