Risks Associated With a Low Mortgage Down Payment

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There are multiple factors which affect the terms your mortgage lender will advance for you. One of the key ones is the amount you will put down as the down payment for your property’s purchase.

Most lenders will need a minimum of 20% of the price of your property’s purchase as a down payment. This has proven as one of the biggest hurdles towards actualizing most people’s dream of homeownership. To this end, there are now some types of home loans which require little or no down payment like the VA and FHA loans.

A mortgage planner is the best-placed expert to assess your financial circumstances and the prevailing housing market conditions and advise you on the best approach for you. There are several risks you can avoid by putting down a substantial amount in down payment for your property.

The following are some of these risks.

Increased Monthly Repayments

If you can afford to put down a substantial down payment amount for your property, this means the principal your lender will advance you will be reduced. A reduced loan principal consequently means lower monthly repayments for your loan depending on your loan’s term. The reduced repayments mean you will be left with more money in your monthly budget and unlike most homebuyers will not struggle to make your payments.

High Interest Rates

Mortgage lenders will generally view a borrower with a low down payment amount as a high-risk one when considered in conjunction with other elements. This means they will charge you a high interest rate to minimize their risk. Moreover, a low down payment will increase your LTV (loan-to-value) ratio. This will also lead to an advancement of a high interest rate by your mortgage’s lender. The high rate might not seem like much initially, but it will significantly increase the overall amount you pay at the conclusion of your loan’s term.

Payment of Mortgage Insurance

Lending over downpayment

A down payment lower than 20% of your property’s purchase price will necessitate the payment of mortgage insurance. The coverage is meant to cushion your lender in case you default on your loan’s repayment. There are several federal and private mortgage insurance programs available. These charge 0.5-1% of your home’s value annually as their premium which translates into several thousand dollars for most properties.

High Risk When Selling

The property market is volatile. If you need to sell your house during the market’s downswing, you might find yourself at a disadvantage if your down payment was low. This is because your mortgage balance might be higher compared to your home’s prevailing value. This makes it hard for you to sell your home, make a profit and fully repay your mortgage and offers you minimal flexibility in accepting the offers you get.

Taking the time to put aside a tidy sum for your property’s down payment is worth it. This simple task will save you a substantial amount of cash by averting the above risks when you apply for a loan and put you on a solid financial footing. Moreover, it will allow you to afford a range of homes you ordinarily would not with a low down payment.

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