Is a Low-Down Mortgage Right for You?

Getting a low-down mortgage can provide you with a way to purchase a home without coming up with a large amount of money upfront. While this type of mortgage can be beneficial, there are a few potential drawbacks that you will need to know about also. Here are a few things to consider about low-down mortgages and how they work.

Low-Down Mortgage

With a standard mortgage, you are going to have to come up with at least 20 percent of the purchase price out of your pocket. This can be a very substantial investment when you get into more expensive houses. When you opt to go with a low-down mortgage instead, you will be able to invest a lot less of your own money. For example, with an FHA loan, you can put down as little as 3.5 percent of the purchase price. This is a substantial difference between a low-down mortgage and a standard mortgage.

Keep Reserves

The biggest benefit of getting this type of mortgage is that you are going to be able to hold onto your cash reserves. When you have to put a substantial amount of money down, this is going to cut into the amount of savings that you have. Being able to have a large amount of money in savings is going to be beneficial in a number of different ways. By spending all of your money on a down payment, you are not going to have as much capital available to invest in the markets. 

Private Mortgage Insurance

One of the drawbacks of getting a low-down mortgage is that you are going to have to come up with private mortgage insurance. Private mortgage insurance is a type of insurance that you must pay for on behalf of the lender. The lender is going to require this in order to insure themselves against the possibility of you defaulting on the mortgage. If you default on the mortgage, the private mortgage insurance company is going to pay the lender the balance that is owed. Private mortgage insurance is going to add money to your monthly payment. In many cases, you are going to have to pay at least $100 extra per month for this insurance.

Interest Rate

Something else that you will want to take into consideration is the interest rate. Many times, lenders are going to give you a lower interest rate when you make a large down payment. Therefore, you are going to have to decide whether putting a small amount of money down is going to be in your best interest in the long run. If your interest rate is higher, this is going to increase your monthly mortgage payment.

Making the Decision

If you can get a low interest rate and the private mortgage insurance is not too unbearable for you, getting a low-down mortgage can be beneficial. Just make sure that you are not going to be paying too much money overall do so you can avoid paying extra upfront.