Sunday, January 14, 2007

The Cost of a Lower Mortgage Down Payment

First-time homebuyers often have difficulty coming up with a down payment for a home loan. This is usually due to their age and income. While these homebuyers often qualify for a mortgage based on their income, debt level, and credit history, they would be denied if lenders held them to a specific down payment requirement.

Many lenders recognize this and have begun extending mortgages to homebuyers that are not able to pay the traditional 20 percent as a down payment. Not having to come up with so much money for a mortgage down payment is a good thing for home buyers. It removes much of the pressure from having to save up such a large amount of money to purchase a home.

What many lenders fail to mention is that not having a mortgage down payment can cost the homebuyer in other areas of the mortgage. Often the costs are disguised in a way that keeps homebuyers from realizing that they have been added in because of the lack of a down payment.

Increased Interest Rates Some lenders make up for the lack of a mortgage down payment in a higher interest rate. A lender can legitimately determine that you are at a higher risk of defaulting on your mortgage based on the lower down payment. In fact, there is a direct correlation between the amount a homebuyer pays in mortgage down payment and the rate of mortgage defaults. Homebuyers that pay lower mortgage down payments tend to default more than those who pay higher down payments.

To make up for the risk associated with the lower mortgage down payment, the lender can charge a higher interest rate to your loan. This increased interest rate means that the cost you pay for your loan is higher than if you had a down payment.

Private Mortgage Insurance Another way that lenders can make up for the lower mortgage down payment is through requiring you to pay private mortgage insurance. Private mortgage insurance, PMI, is required by most lenders when you pay less a mortgage down payment less than 20 percent. PMI protects the lender by paying your mortgage in the event that you are unable to.

The cost of your PMI depends on the amount of the home you purchased and the amount of your down payment. You are able to cancel the insurance once you have gained 20 percent of the mortgage through your down payment and subsequent mortgage payments.

Keep in mind that the lender isn't required by law to cancel it. In fact, some conditions can keep you from canceling the insurance even after you have reached the 20 percent mark. If you have not kept your payments current, you have other liens on the property, or you have a high risk loan, you may not be able to cancel your PMI after you have gained 20 percent in equity.

Even though you don't save up thousands of dollars for a mortgage down payment upfront, you can still end up paying these same thousands in increased interest and private mortgage insurance.

About the Author
Blair Gwilt is the owner of the website,
Starting Real Estate Investing. For a free ebook about no money down real estate investing, go to, How To Invest In No Money Down Property

Mortgage

1 comment:

Dr Purva Pius said...

Hello Everybody,
My name is Mrs Sharon Sim. I live in Singapore and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of $250,000.00 to start my life all over as i am a single mother with 3 kids I met this honest and GOD fearing man loan lender that help me with a loan of $250,000.00 SG. Dollar, he is a GOD fearing man, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs Sharon, that refer you to him. contact Dr Purva Pius, call/whats-App Contact Number +918929509036 via email:(urgentloan22@gmail.com) Thank you.