Down Payments

As a homeowner entering into a traditional mortgage payment we usually look at the immediate picture in front of us. We ask the hard and immediate questions such as what our payment will be each month, what our interest rate is and how much we will end up owing in fees and closing costs.

Although these are valuable things to know it is also smart to look at the long term picture and ways to improve on it.

Down Payment and Extra Mortgage Payments:

Do a down payment: Ranging from 3.50% to 20% of sales price this will give you a lower and more manageable monthly payment plus put equity into your home that you can tap into later.

LOAN TYPES:
FHA – 3.50%
Conventional – *5% to 20% (required down payment percentage can be determined based on FICO)

Make extra payments:

If your financial picture is one that can afford this option, if done properly, it can shorten the time it takes to pay off your loan, which also ensures you will be paying less interest in the long run.

What to do before making Extra Payments

1. Decide if this option is right for you – If you are in a low-interest rate mortgage paying extra may not outweigh the tax benefit you could receive.
2. Call your lender to see if they have a bi-weekly payment program – Without this type of program, there is no benefit to making extra payments – in fact you could lose interest since lenders only credit payments when they are due and not when they are sent in.
3. Refrain from making overly large payments – It won’t affect your mortgage payment, that was set in stone the minute you signed the loan papers and in times of financial hardship you may wish you had that money.

Instead of a bi-weekly option consider setting up your own early payment program using the formula below:

Take your monthly principal and interest payment and divide it by 12 (example on a $1800 mortgage if you divide it by 12 you get $150 dollars, so you would add that to the $1800 dollars and pay $2300 a month)

This formula will give you the same results as a bi-weekly mortgage plan without the added cost of a set up fee.

Down Payment Options:

1. Cash in a bank account – Required to be seasoned money (needs to have been sitting in the account untouched for 60 to 90 days depending on loan type)
2. Mutual Funds / Stocks / IRA/ 401K
3. Proceeds from sale of another property – Moving into a lower cost home would free up cash from the sale that could be used as a down payment.
4. Gift from an immediate relative – The relative in question will be asked to complete a gift letter insuring they are gifting the money to their relative.

Unacceptable Down Payment Options:

1. Credit cards – Using it for a down payment could adversely affect your debt to income ratio so lenders just won’t let you do it.
2. Credit card cash advances, Cash on hand or unseasoned money – This is any money that has not remained in a bank account untouched for the required 60 to 90 days.

With a voluntary down payment it’s important to remember to factor in the unexpected things when trying to land on a down payment amount. You don’t want to be caught without cash when the inevitable costs connected to being a home buyer trickle in.

Down payments and extras payments are two very plausible ways to decrease the life of your loan and still keep ready cash available if a financial crisis should arise.