This is Morgan. He's married. He just had a new baby, and he's ready to buy his first home. This is: A Home of Your Own. Buying a home requires making some serious decisions that can greatly affect your future. Once my wife and I had calculated the mortgage payment we could comfortably afford, we then realized it was time to figure out how much money we'd need to make a down payment. I know that most home mortgages require a down payment of between about 3.5 and 20% of the purchase price, but my financial adviser gave me a couple of additional points to keep in mind. First, the higher the down payment I make, the lower my interest rate will be. Second, different loan programs require different down payment percentages. For those of us who can't come up with 20%, you can look into an FHA loan. The FHA--the Federal Housing Administration--insures loans that require as low as 3.5% down. Also, in certain situations, part of the down payment may come from a friend or family member in the form of an equity gift. Some states, cities, nonprofit housing groups and unions offer down payment assistance programs that provide qualified borrowers, like low-income buyers, first time buyers, teachers, police and firefighters with part of their down payment through a grant or loan. Another consideration in calculating your down payment is the loan to value ration, which expresses the amount of your loan as a percentage of the property's value. The lower your down payment, the bigger the loan you'll need to take out. The bigger the loan you take out, the higher the LTV. Lenders consider loans with high LTVs to be at a higher risk of default, so when you make less than a 20% down payment, most lenders require the borrower to pay for either private mortgage insurance or government mortgage insurance, which increases the cost of the mortgage. Although mortgage insurance costs vary, for an FHA loan, a borrower will pay 1% of the loan amount at closing, and as much as 1.5% annually, usually made in monthly installments. With documentation - such as an appraisal and payment receipts - you may be able to cancel mortgage insurance when your equity in the property reaches 20%. Ultimately, you have to ask yourself if it's worth paying private mortgage insurance each month in order to receive the benefits of home ownership. Or, are you willing to wait longer and save more for a larger down payment to avoid PMI? My financial adviser made the trade-offs obvious. Usually, the less money you have to borrow, the less you'll have to pay in interest over the life of the loan. That means you'd have to save more before you buy a house with a loan requiring a 20% down payment. If you have a lower down payment, you don't have to pay as much up front, but you'll have higher monthly costs to cover mortgage insurance payments. When it comes to home buying, knowing the impact of each choice can help you make your decisions with confidence.
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