Downpayment when buying a home - Options and Pitfalls

Buying a dream home is a daunting task for majority of people, especially so for those who have limited finance options. But thanks to different mortgage programs, there is definitely one for everyone.

In the earlier times, the buyers had no choice but to follow a conventional mortgage plan, which asks the buyers put down a 20% of the total cost of the home. With time many options cropped up fortunately for the new buyers. Even in majority of the contemporary mortgage programs an initial down payment is usually solicited, although there are some exceptions.

To obtain the best offers on interest rate as well as down payment options make sure some money is set aside for making the initial down payment, and the more money a buyer can afford as down payment the better for him, preferably a 20% of the cost.

But this 80/20 option is becoming a passé and there are novel mortgage programs with 0-20% of down payment, of the mortgaged value of the property. There are some mortgage lenders who ask no down payment at all, while there are some who ask for a 5% down payment. Remember these mortgage programs make it affordable for homebuyers to get into their dream home, no doubt, but there are some important factors to reconsider.

When the buyer takes a loan out with less than 20% down payment, 99% of the mortgage programs ask the buyers to pay a private mortgage insurance (PMI), which is usually assessed at 1% of the total loan value and is added into the monthly payment. Noteworthy is that the PMI does not go towards the repayment of the loan or the interest per se. Besides, the PMI payments are also not tax deductible and as the loan amount drops below 80% of the estimated value then the PMI is eliminated.

There is another mortgage option where a buyer can avoid buying the private mortgage insurance, going for a piggyback loan, which is nothing but taking 2 loans. The first one covers 80% of the cost and the second one covers the rest of the 20% of the cost.

All said, a good percentage of initial down payments truly end up being cheaper years down the lane. Because the buyers do not have to purchase mortgage insurance and it will decrease their overall mortgage payment for up to 30 years. It also means that the buyer has a good share of the equity of his home, which is extremely important to have because any appreciation in that equity will benefit you more than the lender.

Besides, choosing a right mortgage broker will make a huge difference on a person's financial portrait for many years to come. So go ahead and meet a mortgage consultant who can help in presenting a number of workable options based on individual's existing finances and suggest an appropriate mortgage program that makes buying a home much more affordable as well as a pleasurable part of one-time big investment of an individual's life.