The Benefits of Making a Larger Down Payment when Purchasing a Home
Generally, when purchasing a home in NY, buyers provide the seller’s attorney ten percent (10%) of the contract price as a deposit on the home to be held in escrow until closing. The buyer will finance eighty percent (80%) of the contract price and provide the remaining ten percent (10%) at closing. Financing eighty percent of the home value is known as a conventional mortgage.
If you have the financial ability to make a down payment that is 20% or greater, here are the top five reasons to do so:
Avoiding PMI Premiums– Lenders routinely require homebuyers who borrow more than 80% of the home’s value to pay Private Mortgage Insurance (PMI) which typically amounts to 0.5% to 1% of the loan amount. The purpose of this is to insure the lender in the case that the borrower defaults. PMI premiums alone, can rack up to thousands of dollars a year that the borrower is responsible. The PMI disappears when the borrower gets the equity on the home to the 20% level.
Lower Monthly Mortgage Payments– Simple math: If you borrower less, you will have less to pay back. Often, borrowers are so excited in purchasing the home, that they neglect to calculate h how much a loan will cost them in the long-term. Here is a simple example: a $50,000 loan at a 4% fixed interest rate over a 30-year term will cost the borrower $85,935. That is an extra $239 a month for 360 months.
Less Interest– If you borrow less, you will owe less in total interest. For example, let’s assume that you are contemplating whether to borrow $450,000 or $500,000. A $500,000 loan at a 4% fixed interest rate over a 30-year term will cost you $359,348 in total interest over the life of the loan. In contrast, a $450,000 loan at a 4% fixed interest rate over a 30-year term will cost you $323,413 in interest over the life of the loan. The difference in the extra $50,000 borrowed, is an extra $35,935 of debt accumulated.
Conforming Loans v. Jumbo Loans– a conforming loan is a mortgage that meets the underwriting guidelines (credit, income, assets requirements) of Fannie Mae and Freddie Mac, the government-backed pair that buy and securitize mortgages on the secondary market. Additionally, the loan amount must be at or below the conforming loan limit (set by the FHFA – Federal Housing Finance Agency) to be considered conforming. This limit was as high as $729,750 in the highest-cost regions of the United States, but on October 1, 2011 it dropped to a maximum of $625,500, and the traditional conforming loan limit is lower than $417,000 (NY). As a result, mortgage rates are generally lowest for loans at or below the traditional $417,000 loan limit, while loan amounts between $417,001 and $625,500 (NY), known in some circles as conforming jumbo loans, will be slightly higher. For outright jumbo loans, over $625,500, you’re looking at even higher mortgage rates, depending on the type of loan and the issuing lender’s risk appetite.
Beating the odds– In a healthy real estate market, quite often the seller will entertain multiple offers. Naturally, the seller is inclined to choose the more attractive offer. This boils down to more than just a higher offer, rather keen sellers also give weight to the issue of which buyer is most likely to successfully close the deal. Failure to obtain financing is the number one reason most real estate transactions don’t close. However, when a buyer puts a larger down payment, this creates a driving incentive to close and the likelihood of bank approval become greater.
For more information on this issue or the home-buying process call Kalantarov Law, PLLC at (718)425-4162 to speak with an experienced Real Estate Attorney. We will work closely with your lending institution or mortgage broker to represent your best interests and potentially save you money on closing costs.