Whether you’re buying a home for the first time or the fifth, figuring out the down payment amount gets a little tricky. On one hand, you may have people telling you to put the traditional 20% down since it will help you avoid paying PMI (Private Mortgage Insurance) and may reduce your mortgage interest rate. On the other hand, you see how low interest rates are, and it makes you wonder if it makes more sense to use some of that down payment money to pay off debt or make home improvements to your new house. After all, having a low interest rate on a mortgage loan means you’re borrowing money at a low price compared to credit cards and personal loans. This means if you were thinking about paying off or reducing debt, it may make sense for you to use some of that down payment money to do so.
Before making this decision, make sure you do the math for how much you’d actually save from paying off higher credit card debt and how much your mortgage interest rate would increase your monthly mortgage payment (in the case that a lower down payment adds PMI and a higher interest rate). Or, consult with a financial advisor to help you make the decision that makes the most sense for you.
Low Down Payment Mortgage Options
Okay, so you’ve done the math and realized that it makes financial sense for you to use some of the cash you had saved up for down payment to pay down debt or home improvements – now it’s time to look into what your low down payment mortgage options are.
Are you a Veteran? If so, this is the best option for you, since it allows you to put 0% down for a home. Keep in mind there may be some funding fees, which means that you should compare this with other loan options to make sure that you pick the right one for you.
If you’re interested in also keeping your mortgage payments low, you can get a VA ARM (Adjustable Rate Mortgage), which allows you to lock a low interest rate for five, seven or 10 years. This is a good option if you’re like most people and move approximately every four to five years.
If you don’t qualify for a VA loan, the next best thing is an FHA Loan. It requires only 3.5% down and you may actually use a gift from a family or friend to help with the down payment. Even though this loan option is more geared towards first-time home buyers, you may still qualify as a repeat buyer if it’s your first time getting an FHA loan. So, talk to your banker to see if this is an option for you.
Just like with a VA loan, you can also get a five-, seven- or 10-year ARM to help you keep your monthly payments low.
Conventional loans can also be considered a low down payment option since you can put as little as 5% down. Sometimes, interest rates are lower for a conventional (30-year or 15-year fixed, for example) than for another type of loan, like FHA.
There you have it – some great low down payment options for those looking to take advantage of low interest rates and real estate market conditions.
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