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Should I make a big down payment or a small down payment?

Home » Real Estate » Obtaining Financing for a House » Should I make a big down payment or a small down payment?

Experts say that the amount of your down payment depends partly on your ability to pay and a great deal on the type of mortgage you choose. If you can afford it, it is suggested that you should put down at least 20% of the sales price of a house.

That's the magic number for avoiding having to buy private mortgage insurance, which pays off your lender if you default on your loan. Lenders don't require mortgage insurance when you put down that much money because they realize that the more equity you have in the house - the more money you invest in it - the less likely you will be to walk away.

Many first-time buyers, however, put down just 10 or 15% of the purchase price and pay for the mortgage insurance. In fact, if they're eligible for an FHA loan, they only need to pay 3 to 5% in cash. And those who served in the military may be eligible for a Veterans Affair loan that doesn't require any down payment.

Be aware, however, that private mortgage insurance adds on to the price of your home considerably. If you decide to put down just 10% on a $100,000 house, you're going to pay around $41 a month for mortgage insurance. That amounts to an extra $14,760 of the life of a 30-year loan, so if you do decide to go with a small down payment, be sure to drop the mortgage insurance as soon as you've paid for 20% of the house.

Currently, lenders are under no obligation to notify you that mortgage insurance is no longer needed. Many will require borrowers to get new appraisals on their homes to determine if they've paid off 20% of the present market value, not 20% of the original loan.

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