Buying a home can be an excellent investment, which is for a number of people the largest investment they will make in their life. Since buying a home can be cost prohibitive, the majority of homeowners opt to use a special type of loan called a mortgage to pay for their home.
A mortgage is simply a loan that is for the value of the home, with the bank or lender taking possession of the loan should the homeowner not be able to pay for it. Traditionally, lenders had required homeowners to come up with a 20% down payment for the home, but over the last 15 years many lenders began to move away from the traditional down payment, often requiring 10%, 3%, or even in some cases no down payment.
Today, as the credit market tightens and foreclosure rates increase, lenders are beginning to move back towards a traditional 20%, or in some cases larger, down payment. While it may still be possible for some to receive a mortgage without a down payment, there are actually a number of benefits of putting at least a little bit of money down on the home.
One of the biggest benefits of paying a down payment is that you are instantly creating equity in the home. Equity is the difference of the amount owed on the mortgage, which is called the principal, and the value of the home. Having 20% of equity in the home from the beginning not only means that if you were to turn around and sell the home, you would get to keep some of the profits, but also means that if something happens, you can borrow against the equity of the home.
While it is important to be very careful using the equity to receive a loan, it is possible to get a home equity loan or a home equity credit line, which can be used to pay for repairs or other expenses.
Another big advantage of saving up for a down payment is that you will often be able to receive a much better interest rate and mortgage terms, than you would receive with no down payment. Many of those who received subprime mortgages in the time leading up to the financial crisis, went with a no down payment Adjustable Rate Mortgage. This type of loan was very attractive at first, with a low monthly payment, but when the interest rate went up, the monthly payment quickly became unaffordable.
Instead, by saving some money for a down payment, banks and lenders will typically offer you much better rates and you will be able to choose which lender to use, rather than having the only option be a subprime mortgage.
Simply having a 3% down payment might enable a borrower to receive help from the government by applying for assistance from the Federal Housing Administration, so it is almost always better to save up for a down payment, before applying for a mortgage.
By:Charles Whitmore
