An important criterion when considering the purchase of a home is the amount of the down payment you are willing and able to make. While 20 percent of the purchase price is the norm and is the figure that is generally favored by lenders, you may qualify for a mortgage with as little as 10 percent down in some cases. You should take several factors into consideration when determining the right down payment amount for you.
You're more likely to qualify for a mortgage with a lower interest rate if you put down 20 percent as opposed to 10 percent, as lenders will view you as less of a risk for defaulting. A difference of even 1 percent can have a major impact on your total payments over time. For example, a $200,000 mortgage for 30 years at an interest rate of 5 percent would require a monthly payment of $1,073.64. By comparison, the same mortgage at 4 percent interest would result in a payment of $954.83. Over 30 years, the total difference between the two would be $42,771.60.
Private Mortgage Insurance
Whenever you make a down payment of less than 20 percent, you can expect that the lender will require you to carry private mortgage insurance to protect itself against your possible default. According to the CNN Money website, the Mortgage Insurance Companies of America, an organization that provides information on legislative and regulatory issues for the private mortgage industry, indicates that PMI on a home priced at $159,000 can cost anywhere between $50 and $80 per month.
Because you will need to borrow more money when you put 10 percent down as opposed to 20 percent, your principal payments will also be higher. When combined with the higher interest and PMI, your debt-to-income ratio, which compares your monthly debt payments to your gross monthly income, will also be higher. If your proposed monthly mortgage payment exceeds 28 percent of your gross monthly income, it can be more difficult to qualify for a loan at favorable terms.
If you don't want to delay the purchase of a home, putting 10 percent down means you can be in a home much more quickly as you need only half the payment amount when compared to a 20 percent down payment. The sooner you purchase a home, the sooner you can begin to build equity, as well as repay the loan in full. For some people, it could take many years to accumulate the 20-percent amount, especially if they wished to purchase a more expensive home.
Coming Up With 20 Percent
Having the funds available to come up with a 20 percent down payment may pose some difficulty, especially for first-time homebuyers. However, if you have an Individual Retirement Account, or IRA, you may be able to dip into these funds to pay for the purchase of a home. Although, you need to be aware of any penalties or tax implications you may face as a result. The IRS does allow penalty-free withdrawals if you are a first-time homebuyer, but, these withdrawals are not without limitations and ramifications.
You can withdraw a maximum lifetime amount of $10,000 without penalty to use towards a home purchase. For purposes of the homebuyer exemption, first-time homebuyers are those buying their first home, or if you or a spouse have not purchased a home in the past two years.
Also, just because you can access these funds penalty-free, does not mean they are tax-free. The taxes you can expect depend on if you have a traditional IRA, which is subject to income tax, or a Roth IRA, whose contributions are made with post-tax income. Before deciding to withdraw from a retirement account to pay for a house, be sure you familiarize yourself with everything it entails.
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