We understand how confusing and hard it is to decide the on the appropriate down payment amount.
The best route for each household differs depending on their situation and personal preferences. The summary below outlines four common issues all home buyers and investors should consider regarding their down payment:
- Down payment options
- Cost of lower down payments
- Benefits of lower down payments
- Personal considerations
We have provided the following information for the purpose of provoking thoughtful and careful consideration about different financing programs available. We do not want to steer you toward one particular program, but merely present the options to consider when purchasing your Florida home or investment property.
Down Payment Options
The “Down Payment Requirements” portion reviews the minimum down payment needs for conforming loans, as well as other available alternatives with non-conventional (FHA loans) programs.
For example, you are able to purchase a single-family home or condominium with as little as 3% down payment. However, you will most likely be required to purchase mortgage insurance (often called PMI, private mortgage insurance.)
Mortgage insurance will be applied with the conforming loan amount is MORE than 80% of the purchase price (simple translation: down payment is less than 20%.) In addition, the lower the down payment, the higher the premium ratio charged.
Military veterans are qualified for a VA loans and have the easiest route to buying a Florida home with no money down. VA loans can provide up to 100% financing for qualified military personnel and veterans. There is also the option for non-conforming mortgage loan programs that allow for 80/20 set-ups, which give borrowers the choice to obtain a second mortgage to cover the 20% down payment. Bottom line, regardless of your credit and income, you have many options to purchase a home with no money down.
Cost of a Lower Down Payment
Two primary costs of low or no down payment programs:
- Higher interest rates
- Higher mortgage insurance premiums.
<--The downside of a small down payment, whether you are using a conforming loan or a non-conforming program, is that you will need to pay higher interest rates and mortgage insurance.--> The downside of a lower down payment, whether you are using a conforming loan or a non-conforming program, is the higher interest rates you’ll be required to pay and mortgage insurance.
Mortgage insurance is calculated against the loan amount, so you are penalized for a lower down payment — lower down payment means a higher loan amount and a higher mortgage insurance rate.
Once sufficient equity is produced, mortgage insurance can be removed. If the property shows at least 20% equity within a few years, the mortgage insurance can be refinanced away.
Another common burden of a lower down payment is the higher loan amounts, which translates into a higher monthly payment for you.
Consider, for example, the purchase of a $100,000 condominium with market interest rates of 6.500%.
- With a 5% down payment, the loan of $95,000 would have monthly payments of $600.46.
- However, a 10% down payment would decrease the loan amount to $90,000 and the payment to only $568.86 per month.
Over the course of the first few years of your mortgage loan, the bulk of your monthly payments are for interest, which is normally tax-deductive. You actually are able to get a bit of your monthly payments back at the end of the year in the form of tax deductions.
Benefits of Lower Down Payments
Despite the disadvantages of low down payments, there are advantages. Take the time to weigh the two and assess which is the best choice for you.
The chief benefits of lower down payment include the following:
- Increased liquidity.
- Higher rate of return. Your property’s appreciation will be the same whether you put 3%, 5% or 20% down payment. In fact, your rate of return actually decreases as you make a larger down payment, as discussed below.
- Opportunity cost. In some cases, the smart investor can make more money from available cash by placing it in other investments.
Deciding on the amount to put down should be carefully considered. Make your own personal calculation of the monthly payment you can afford. The lender will qualify you for a certain level, based on your income. The qualification level is often different from the level that you feel comfortable with.
Your mortgage lender may have qualified your income for a monthly mortgage payment of $1,500.00; however, you may feel that you are realistically unable to only afford $1,200.00 per month. In this instance, you must lower the loan amount by increasing the down payment or finding a less expensive property.