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Down Payments

The largest hurdle for the first-time homebuyer is usually the task of accumulating the funds for the down payment.

 

The average apartment renter knows the pains of scrounging up enough to cover first, last and security. Imagine the financial strain of collecting 20% of a multi-million dollar home up front! Even the most modest of homes might call for thousands of dollars as down payment. And while it is usually not a hard-and-fast rule to provide 20% as a down payment, there are a few subtle indicators why this amount may be desired by the lender.

Securing the funds for a down payment that meets or exceeds 20% of the total asking price of the home may provide the borrower the ability to forego mortgage insurance. This special kind of insurance is included to safeguard the lender should the borrower default on mortgages with a loan-to-value percentage higher than 80%.

The loan-to-value percentage or LTV is a ratio that places the remaining cost of the loan against the appraised value of the home. A 20% down payment instantly drops that LTV to 80%. By supplying that much at the start also provides the borrower some initial equity in their purchase.

Certain loans may require a down payment amount less than 20%. The required down payment would likely be lower if the borrower is seeking an FHA loan as compared to a conventional loan. Each lender is different and the well-informed prospective homebuyer should stay on top of advertised rates and deals in the months leading up to the purchase of a home.

It is also important for the first-time homebuyer to remember that there are other fees associated with acquiring the keys to their dream home.

It is also important for the first-time homebuyer to remember that there are other fees associated with acquiring the keys to their dream home. Those fees can include, without limitation, property taxes, transfer fees, recording fees, inspection fees and more. Each mortgage agreement is different and some of these fees might be negotiable or possibly waived depending on the deal the lender and borrower agree upon.

Imagine a situation where you've only saved enough to satisfy the 20% down payment and cover all the fees. Then your car breaks down right after the deal is finalized. This is a dreadful scenario, and it is one that no one hopes to encounter. To help avoid this, consider consulting with a financial advisor before signing on the dotted line. The advisor could help the borrower determine a realistic amount of money that they should save to cover the down payment and fees, leaving enough in their savings to cover unforeseen emergencies.

Ultimately, no one would argue the inherent value of a larger down payment. More money up front means less should be needed throughout the course of the repayment process. When the prospective homebuyer is in a position to slide more money across the table up front without sacrificing economic stability and keeping a little extra for emergencies, then they are in a great position to maximize the equity of their investment.

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