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A fixed mortgage loan provides you with the greatest stability over time. Your rate can never adjust higher, and your monthly payments will remain consistent throughout the life of the loan. This provides you with a better chance to plan your finances both today and in the future. However, to get a fixed loan, you must be a qualified applicant. Aside from good credit and a stable income source, your down payment will help qualify you for the fixed rate loan you are seeking.
Minimum Down Payment Guidelines
High-risk mortgage companies used to offer low to no down payment mortgages prior to the real estate market collapse of 2007. At that point, the practice of offering mortgages with no money down was exposed as predatory in nature. As a result, all ethical lenders require money up front. The amount of the down payment required varies drastically from lender to lender, however. As a general rule, a borrower should place at least 10 percent down on a home. However, loans sourced with the assistance of a Federal Housing Administration guarantee are available with as little as 3.5 percent down. Without this guarantee, putting down less than 10 percent will typically result in an adjustable-rate or high rate mortgage.
Closing Cost Expenses
It is important to factor in closing costs when considering how much liquidity you have for a down payment on a property. Closing costs will amount to between 1 and 3 percent on most mortgages. Additional expenses, such as the cost of moving into a new home, paying homeowners' association fees, insuring the home and more, will add to the initial expense of purchasing the new property. Therefore, after you make a down payment, you should have at least 5 percent of the home's total value still available in liquid savings.
Desirable Down Payment Recommendations
If you have additional room to make a larger down payment, you should aim to place as much as 20 percent down. With 20 percent down on a home, the lender will remove the requirement for private mortgage insurance. This means you will save a few hundred dollars a month in insurance premiums. Placing more than 20 percent down is possible but not always recommended. Most financial advisers remind homeowners their dollars could go further invested in a mutual fund or retirement savings for the future than tied up in home equity in the short term.
Risks of a Low Down Payment
Even if your lender will permit a fixed-rate loan with a low down payment, the option is not always wise. Your monthly payments will be much higher with this choice. Further, even if the interest rate is fixed, it will still be very high. The result is years in debt to the lender where you have little equity in the home itself. If anything were to happen that rendered you unable to remain in the home, you could lose money through the home's sale. Building equity quickly through a large down payment helps protect you from these situations in the future.
