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Down Payments

When purchasing a new home, one of the biggest decisions you will make is what sort of down payment you are going to place on your home. Down payment amounts have a big affect on several aspects of your purchase, including your principal mortgage. While many are limited by savings in their down payment options, those who have a choice will need to consider several factors in deciding on how much money to put down.

The main question you will have to answer is if the money you are considering adding to your down payment will earn you a better return if put to another use. When considering this question, you may be tempted at first only to consider the interest rate on your principal mortgage. For example, suppose you have a seven percent rate on your loan. An increase in down payment of $5000 will decrease your loan by the same amount, and save you from paying interest on that $5000.

However, there are other factors to consider. First, you have to consider how much an extra down payment will save you in upfront fees expressed as a percentage of your loan amount (fixed dollar fees don’t factor in, for obvious reasons). Also, you should consider how an extra down payment might affect your need for mortgage insurance.

A down payment equal to 20 percent of the purchase price eliminates the need for mortgage insurance. The savings realized by not paying mortgage insurance premiums must be considered when thinking about whether to make a higher down payment, if the down payment amount would put you over the 20 percent threshold.

Another possibility to consider is that a higher down payment might lower your rate. This could be true if the extra down payment would bring your principal mortgage amount below $252,700. This figure is significant because it is the limit over which federal secondary mortgage agencies such as Fannie Mae or Freddie Mac won’t purchase loans. Loans for below this amount save anywhere between a quarter and three eights of a percentage in interest. If applicable, this lower rate must be factored in with your down payment decision.


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