Improving Your Credit Score

3 Quick Tips About House Down Payments

Improving Your Credit ScoreIf you are considering buying a house, you have probably been going back and forth trying to figure out the best down payment option for your financial circumstances. Well, we are here to tell you that there is no perfect amount; balance is key to your down payment! Planning to sell the house within a few years of ownership? If you plan on doing this, having a greater down payment exposes you to a greater risk if real estate prices fall. But, a larger down payment can also mean lower monthly payments. Try not to think about the amount of money you want to use as a down payment, and think about the percentage of the value of the house instead.

The Famous 20

A down payment of 20 percent can be an ideal down payment for some. With 20 percent down, borrowers are no longer responsible for carrying Private Mortgage Insurance (PMI). PMI is a protection most lenders require to cover their investment in you should you not repay your loan. The premiums for this insurance are paid by you, either as a lump sum at closing or included with the mortgage payment, and thus make your monthly payment higher. Lenders also see a 20 percent down payment as a sign of a responsible borrower. Meeting that down payment amount means the borrower typically has a lifestyle of spending responsibly and saving money, both of which are signs of a solid credit risk. Regardless of your credit score, a 20 percent down payment can help save on the costs of the loan.

Home Buyer Assistance Programs

There are many home buyer assistance programs designed to help people reach the famous 20 percent down payment. These come in two forms: grants and delayed repayment loans. These are offered by housing departments at all levels of government and frequently go unused because home buyers don't think they qualify.

Grants are no-strings-attached checks that you have to use for a specific purpose, in this case, the down payment on a home. Many are limited by income level or region of purchase, but they are definitely worth exploring. Even more options are open to first-time home buyers, former or current members of the armed forces and people in public service-oriented professions.

Delayed repayment loans are similar. These are second mortgages held by an organization for a portion of the total cost of the house. They do not begin accruing interest until after you've paid off your primary mortgage, and some of them are forgiven after you've owned the home for a certain amount of time. These are available from housing authorities and private organizations all over the country.

More Than the Famous 20

Making a very large down payment is an investment. Think of your mortgage like a savings account. You make an initial "deposit" when you make a down payment. A portion of your payment goes into your account each month while the rest goes to cover interest, which is the price you pay for living in your savings account. The return on your investment in the large initial down payment is the lower total interest you'll have to pay.

When deciding if you want to put more than 20 percent down, think of your mortgage rate like the rate of return. If you can put another $1,000 down, that's $1,000 less you'll need to borrow. If your interest rate is 4 percent, then the return on that investment is $40 in interest you don't have to pay. On the other hand, you don't have that $1,000 to invest somewhere else now. If your retirement account earns 5 percent, then that same $1,000 will earn $50 if invested there. Making the larger down payment will end up "costing" you $10 in the long run.

As with any other investment decision, weigh the pros and cons. It may have a comparatively low rate of return, but the risk is negligible. Unless the value of your house drops dramatically, you will not lose your down payment. It can be a smart move to put down as much as you can, but make sure to leave your retirement fund and emergency fund intact.