There are a lot of steps in buying a home. Among the things you need to prepare for is the amount needed to make the down payment required by the lender.
This is a form of financial protection for the lenders, and since they require this, borrowers have no choice but to comply. In the past, borrowers had to make at least 20% down payment. However, as years passed, this changed. A big factor for the change is Private Mortgage Insurance (PMI). Lenders allow a down payment that is less than 20% of the property value as long as they have PMI.
What is PMI? Just like any insurance, this guarantees something. Here, this insures the mortgage. It protects both the lender and the borrower. The lender gets paid even if the borrower defaults. The borrower, on the other hand improves his borrowing power. Additionally, this allows him to borrow the amount he needs.
PMI is important and the insurance provider is equally important. This is why you have to check the insurance provider you will have in case you will need PMI. Your lender will normally suggest one and include it in the closing cost together with the settlement statement. However, you do not have to use the services of the provider they have recommended. You can always work with another provider you are more at ease with.
Making the Down Payment
Making the 20% down payment offers a lot of benefits. With 20% down, you will no longer need PMI. Additionally, you will have the confidence of your lender. As such, historically, those making a 20% down payment seldom default on their mortgage. By making a 20% down payemnt, you have also started to build the equity on your home right from the start.
Although there are several advantages of making such a down payment, you can make a down payment lower than 20%. Just make sure you have a good PMI policy.
You can save for the down payment but that will not be easy. Many would acquire a second loan. But this is not recommended by experts, as second loans have higher interest rates. You can borrow money from your parents or other family members and arrange for cheaper rates. You can also make investments that ensure good returns, although that is a challenge is this down economy.
The down payment is an important aspect of your mortgage and your overall home purchase, which is why it is essential that you prepare for it before you even begin to shop for a home.