Did you know that conventional mortgages require a 20 per cent down payment? With the national average home price pushing $400,000 that would mean a down payment of $80,000. Here’s why acquiring some patience and saving up for that home purchase might help:
The more down payment you put down, the less your mortgage payments will be. This makes your day-to-day living and budgeting that much easier. Think of all the interest you will save.
Chances are that you may not pay as much in interest as your neighbour. A lower loan-to-value ratio means the lender views you as a more favourable risk. This, of course, saves you money over the span of your mortgage.
If your down payment is substantial, you won’t be required to obtain mortgage insurance, which is an added expense over and above the cost of your mortgage. Mortgage default insurance protects the lender should you not be able to pay your mortgage. It is expensive, though, and gets pricier the lower the down payment.
Let’s compare a five per cent down payment with a 20 per cent one on a $365,000 home: Based on a four per cent mortgage rate and a 25-year amortization, you will pay $37,000 more in interest payments by putting down five per cent instead of 20. Your bi-weekly payments will be $156 more adding up to over $4,000 more each year.
Dreams of living mortgage free will come sooner if you eat away at your mortgage thanks to the different payment options available these days at banks and credits unions. Take advantage of bumping up the amount of your mortgage payments (usually in the range of 10 to 20 per cent) , making lump-sum payments against your principal annually without being charged, or switch to an accelerated weekly or bi-weekly payment schedule. All of these options will help you achieve financial freedom and have you living mortgage-free a little sooner.