Contrary to what one would think would be common sense, the less you put down on a house, the less your interest rate is going to be.
Why?
In their infinite wisdom Fannie Mae and Freddie Mac. the underwriting gurus of most of the nation's loans, have determined that down-payments of 20-25% which are not insured by Private Mortgage Insurance (PMI) are high risk. Down-payments of over 25% receive lower interest rates. Loans covered by PMI remove the foreclosure risk to lenders.
As an example, in late August a buyer putting down $80,000 on a $400,000 house could have qualified for a 4.875 rate on a 30-year fixed mortgage. This rate was offered to borrowers only putting 5% down. Those who put down 25% got an even higher rate, 5.375%.
Those putting down less have more in their pockets to take care of repairs, cover emergenciecs, etc. And, when there is 20% equity in the home the PMI will no longer be required.
However:
In today's market some lenders are not releasing borrowers from the PMI requirement.
Also, the monthly payments are going to be higher for those putting down less. Example: 25% down on a $400,000 house will require payments of $1,6870 a month. 15% down means payments of $1,906 – $1,799 in principle and interest and $107 in PMI. The PMI is tax deductible, so depending on the borrower’s financial status, the net mortgage cost could be less.
It is advisable to put more down and build on your equity.
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Smart advice for the future buyer. Save up a larger down payment, and pay down the principle when you buy it.
Yes. Let's avoid the next round of foreclosures!