Paying home down payments eases yearly mortgage
Sunday, 27 August 2006

A sizeable down payment saves one thousands of money every year.  This also gives a cushion for the new homeowner. 

Borrowing more than 80% of the home's value pays private mortgage insurance, which protects the lender if the loan would be in a default.  It's the money that doesn't go toward your principal or interest and isn't tax-deductible   That tends to cost 0.5% to 1% of the loan value, up to $3,500 per year on a $350,000 home, or $5,000 on a $500,000 home.    Lenders are making it a lot easier to buy a house without the traditional 20% down payment, but you're going to pay a lot for that option.

A piggyback would be an option.  If one takes one loan for 80% of the cost and another for 20% (or for 15% and pay 5% in a down payment), it can avoid private mortgage insurance.

 Waiting to amass the 20% down payment avoids these exta costs and qualify for a lower-rate loan and keep the mortgage.  This gives a lot more flexibility in the market. 

"Some couples can afford the house when they're both working, but if a kid comes along and one wants to stop working, then they have a problem," says Michael Eisenberg, a CPA and personal financial specialist in West Los Angeles, Calif. Even in his area, where starter homes cost a lot more than $350,000, he recommends that young couples "sit back, stay renting and save your money for your down payment." If your rent is reasonable and the housing market in your area has slowed, there's even less reason to rush into buying.

It is important to put down 20% so to have some equity in case there is a plan to move earlier as expected. 

"In the early years, you aren't building any equity with the mortgage payment," Eisenberg says. "If the market changes or your personal circumstances change and you're forced to sell, you could lose money" if you made little or no down payment. The equity in your home can also give you an extra source of cash in an emergency.