How to Choose a Down Payment or Mortgage Insurance

A down payment on a mortgage used to be one of the most common means to getting a mortgage. New styles of home loans allow for some borrowers to qualify for a smaller down payment and instead to take on mortgage insurance, a monthly payment tacked onto your bill. There are benefits and drawbacks of both.

Difficulty: Moderate

Instructions

1. Determine what your down payment dollar amount would be considering it needs to be at least 20 percent of the appraised value of the home's price, or 20 percent of the sale price of the home. If you can easily afford to pay the 20 percent down payment, it is often wiser to do so as it will reduce the amount of mortgaged home value you have therefore costing you less in interest payments.

2. Figure out what the private mortgage insurance, PMI, is for your home, which is generally one half of 1 percent on the loan of your home. This amount can vary depending on the type of loan you have. A small PMI may be quite affordable and easy to add to your monthly payment if you do not have a large enough down payment to make on the home.

3. Realize that once you hit 80 percent paid on the principal of the home loan you can drop the private mortgage insurance. Most lenders will not do this for you without you alerting them, so keep track of it. Additionally, determine how long you will need to pay the PMI before you reach this amount and consider if the cost is worth not making the down payment.

4. Use a mortgage amortization calculator, available on many financial websites (see Resources), to determine the length of time to reach 80 percent in principal. Additionally, compare the difference in the total loan cost and monthly payments on the loan if the down payment on the loan is made, or not. These costs can help you determine the right way to go based on your budget.

5. Pay as much as you can at the start of your loan to avoid a higher monthly payment and to avoid paying more in interest payments throughout the course of your loan. If you cannot pay the full 20 percent on the loan, pay as much as you can so that you reach the 80 percent threshold faster and pay less in private mortgage insurance.

Resources

• Click for a PMI Decision Calculator.

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