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Why Down Payments Are Important
A Realtor colleague of mine was reflecting on the state of the mortgage industry and the mortgage products that are advertised as "Zero Down" or "100% Financing". She expressed, "If people can't get a down payment together what are they going to do when the hot water heater needs replacing?". She makes a good point. It seems that people preparing to buy a home, whether it's their first home or a second or third home have a hard time putting together enough money for a down payment. The advantage to woning a home (or, at least, the way it used to be) is that you could use the equity built up in your home's value for a down payment on your next home. For first time home buyers it's a different story. In addition to the discipline of saving for an important purchase like a home, the down payment has a few other benefits: * a down payment reduces the amount of the loan. Thus, the larger the down payment, the smaller the loan. Smaller loans mean smaller monthly payments. * a down payment means a better interest rate. Yes, it's true, the less a mortgage company (or bank) has to lend you the less risk they are taking if you don't pay it back. Since they are taking a smaller risk the reward to you is a preferential interest rate. 100% loans always have a higher rate than loans that have down payments. * a down payment gives you more leverage when buying. When you approach a Seller to buy their house and you can show you have the resources for a down payment, which gives you a better mortgage program with a lower rate that Seller will sit up and take notice. There is nothing worse than the uncertainty of wondering if a transaction will make it to settlement or not. Showing a down payment can put a Seller's mind at rest and make the whole process a lot less stressful for everyone involved. Those are just a few of the many good reasons to put you pennies together for a down payment. One of the easiest ways to do this is to set up a savings plan. Even if you only put aside $100 a month it will soon turn into a reasonable amount of money that you can use to buy either your first house...or your next house.
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May, 2012
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