Your First Mortgage Down Payment

By: Gerald Mason

First-time homebuyers often have difficulty coming up with a down payment for a home loan.

This is usually due to their age and income.

While these homebuyers often qualify for a mortgage based on their income, debt level, and credit history, they would be denied if lenders held them to a specific down payment requirement.

Many lenders recognize this and have begun extending mortgages to homebuyers that are not able to pay the traditional 20 percent as a down payment.

Not having to come up with so much money for a mortgage down payment is a good thing for home buyers. It removes much of the pressure from having to save up such a large amount of money to purchase a home.

What many lenders fail to mention is that not having a mortgage down payment can cost the homebuyer in other areas of the mortgage.

Often the costs are disguised in a way that keeps homebuyers from realizing that they have been added in because of the lack of a down payment.

Increased Interest Rates
Some lenders make up for the lack of a mortgage down payment in a higher interest rate.

A lender can legitimately determine that you are at a higher risk of defaulting on your mortgage based on the lower down payment.

In fact, there is a direct correlation between the amount a homebuyer pays in mortgage down payment and the rate of mortgage defaults. Homebuyers that pay lower mortgage down payments tend to default more than those who pay higher down payments.

To make up for the risk associated with the lower mortgage down payment, the lender can charge a higher interest rate to your loan. This increased interest rate means that the cost you pay for your loan is higher than if you had a down payment.

Private Mortgage Insurance
Another way that lenders can make up for the lower mortgage down payment is through requiring you to pay private mortgage insurance.

Private mortgage insurance, PMI, is required by most lenders when you pay less a mortgage down payment less than 20 percent. PMI protects the lender by paying your mortgage in the event that you are unable to.

The cost of your PMI depends on the amount of the home you purchased and the amount of your down payment.

You are able to cancel the insurance once you have gained 20 percent of the mortgage through your down payment and subsequent mortgage payments.

Keep in mind that the lender isn't required by law to cancel it. In fact, some conditions can keep you from canceling the insurance even after you have reached the 20 percent mark.

If you have not kept your payments current, you have other liens on the property, or you have a high risk loan, you may not be able to cancel your PMI after you have gained 20 percent in equity.

Even though you don't save up thousands of dollars for a mortgage down payment upfront, you can still end up paying these same thousands in increased interest and private mortgage insurance.

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