Understanding Down Payments On Houses

By Author: Scott Staudt
Total Articles: 91
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What is the idea behind mortgage down payments, and what should you (or can you) deposit as a deposit?

There was a time in the not too distant past, that many mortgages were available with very little and even no down payment. But down payments are back so you need to understand them.

If you have always wondered why a bank requires a down payment in the first place, you are not alone, especially during recent years, when so many buyers have been able to borrow without a down payment. Times have changed, and low to no down payment loans are rare if not non existent.

A lender wants to make sure that you have a substantial amount of your own funds at risk in the home, and they also want to reduce their exposure by lessening the amount of mortgage required.

Most banks have learned from their sub prime loan problems, and there is probably not a good chance that you will obtain a low down payment loan, unless you are buying a home for the first time. Special programs exist where you may still be eligible. If you have to, how much can you put down as a deposit on a house ?

Ideally, you should ...
... try to make a deposit of 20% of the property, since this will reduce the points you have to pay to keep your interest rate low, and therefore the overall costs on your home. Interest is calculated on the risk of the loan, and the higher the down payment, the lower the risk for the bank, and they will charge you less points. (Points are also influenced by your credit rating-but that's another article.)

But how can you possibly manage a 20% down payment? Even a lower cost house of $175,000 would require a deposit of $35,000. If you are lucky enough to have saved this kind of money, great, but most people aren't, although if you already have a house, the increased value may serve as a down payment. Luckily, many programs are still around whereby first time home buyers qualify for a lower deposit for the purchase of the home. Since these programs are government guaranteed, the banks are willing to accept the lower down payment since their risk is reduced. If a new buyer can put down only 5%, there is a better chance that he will have $8,750 (for the $175,000 home) to deposit.

If you want to learn how to get the most out of your equity if you are an existing home owner, or if you qualify for any plans for a first time owner, contact a mortgage specialist.
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