Anonymous
Anonymous asked in Business & FinanceRenting & Real Estate · 1 decade ago

How will putting 10% down on a home purchase affect my mortgage rate and total costs (as opposed to 20%)?

Will a lesser down payment affect my interest rate, closing costs, fees, etc.?

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  • 1 decade ago
    Best Answer

    When you buy a home using conventional financing with 20% down payment, the LTV [Loan to Value] ratio is 5:1. Generally, the lender considers you a good credit rrisk.

    When you buy that same home in that very same area using conventional financing with less than 20% down payment, the LTV [Loan to Value] ratio is increases. Generally, the lender considers you a higher credit rrisk.

    With your lower percentage down payment - in your particular situation, 10% - how does the lender compensate themselves and convince themselves ["themselves" being the folks who meet on a regular basis and consider home mortgage applications for acceptance or rejection] to lend you, the borrower, the money you need to complete the purchase?

    The lender uses a scale known as "P.M.I." [Private Mortgage Insurance]. It works similar to this example:

    The purchase price of your new home is One Hundred Ten [$110,000.00] Thousand Dollars. You put down Ten Thousand [$10,000.00] and apply for the One Hundred Thousand [$100,000.00] Dollars mortgage.

    The lender says something similar to this,

    "M. ___, we usually require a 20% down payment, but your Agreement shows you're only putting down 10%. Your credit report is OK. We want to lend you the money. BUT, due to the fact you aren't putting down the necessary 20%, we HAVE TO CHARGE YOU A HIGHER INTEREST RATE AND insure your mortgage through a 3rd party.

    At the present time, to insure your mortgage, that 3rd party requires 3 "points". One point is equal to 1% of the mortgage, or in your situation,, One Thousand ($1,000.00). We have to put an additional Three Thousand ($3,000.00) on top of the $100,000.00 you need. This totals $103,000.00.

    This One Hundred Three Thousand ($103,000.00) Dollars will be amortized [reducing your debt by installments] over thirty [30] years at the interest rate of X% with monthly payments of $Y. When you pay your mortgage down to where the LTV is 5:1, the extra amount of $E, will be dropped from your monthly payment and your mortgage will be treated like every other conventional mortgage we finance."

    To further protect our interest in your home, we will escrow for all your real estate taxes and your fire insurance. The yearly taxes and fire insurance premium will be totaled and will be divided by the number of payments we - you and us - decide will be the best and most practical way for you to make your mortgage payments. Would you prefer to pay your mortgage two times each month or every two weeks, OR would you prefer to pay your mortgage once a month?"

    If your taxes and fire insurance total Six Thousand [$6,000.00] Dollars per year and you decide to pay your mortgage on a monthly basis, the additional amount will be $500 extra per month - in addition to your mortgage payment.

    "When those bills are mailed to you by your municipality, county and schoold distract, as well as your fire insurance premium notice, you'll send them to us with your mortgage payment and we will pay the taxes and fire insurance from the escrow account which will be set up at the time of your settlement settlement."

    Because you are paying your taxes and fire insurance premium to the lender each month with your mortgage payment, the lender is taking on the responsibility of paying your taxes and fire insurance.

    The possibility and/or probability of your home being liened and eventually sold for taxes is greatly reduced.

    The possibility and/or probability of your home being denied fire insurance coverage, becaue you failed to pay the fire insurance premium, is also greatly reduced.

    Your responsibility comes down to making your complete mortgage payments on-time or ahead of time each and every time the mortgage payment is due.

    SUGGESTION #1: When you make application for your mortgage, make absolutely certain it is an "open end mortgage". Having this type of mortgage assures you can pay off the mortgage at any time without penalty.

    SUGGESTION #2: Make sure you ask for - and get at the time of settlement/closing/escrow - an Amortization Schedule. This breaks down your mortgage payment to principal paid and interest paid. Those two numbers must add up to the amount of money you pay to the lender. This is stated in your mortgage document.

    When you first get the Amortization Schedule, it is very important for you to understand how it works and how the money you pay is applied. Ask the lender to have someone go over your first amortization schedule with you - so you can easily understand it.

    When you follow your Amortization Schedule, and pay the extra principal with every mortgage payment, you should save tens of thousand of dollars in additional interest.

    That total monthly payment does not include your taxes or your fire insurance premium.

    SUGGESTION #3: If you apply for and get an "A.R.M." [Adjustable Rate Mortgage], each time the interest rate changes - up or down - make sure the lender gives you a new amortization schedule. with your remaining mortgage balance.

    When you first get the Amortization Schedule for you A.R.M., it is very important for you to understand how it works and how the money you paid is applied. Ask the lender to have someone go over your first A.R.M. amortization schedule with you - so you can easily understand it.

    When you follow your A.R.M. Amortization Schedule, and pay the extra principal with every mortgage payment, you should save tens of thousand of dollars in additional interest.

    That total monthly payment does not include your taxes or your fire insurance premium.

    The answer to your second question is Yes.

    Of course, interest rates and points vary from area to area and lender to lender. Shop the mortgage for the best rate, costs and fees.

    I wish you well!

    VTY,

    Ron B.

    Source(s): In the real estate business over 30 years.
  • Anonymous
    1 decade ago

    Putting 10% down is still better than putting 0% down. However, you may not get a break on the rate the way you would if you put 20% down. The only benefit you'll get in the fees will be based on those fees that are a % of the loan amount, so the lower the loan size, the lower those costs (typically the origination fee, title fee). All other fees are usually set costs, regardless of the loan size (appraisal fee, credit report fee). The biggest difference you'll see when putting 10% down instead of 20% is the presense of mortgage insurance. Unless you're doing an 80/10/10 you will have to pay PMI (private mortgage insurance) monthly because you had less than a 20% down payment. The cost of PMI is directly related to the loan size and credit score. Your lender can help you determine what this would cost monthly.

    Source(s): I do home loans for a living
  • Anonymous
    1 decade ago

    If you put at least 20% down you won't have to pay mortgage insurance. If you have less than 20% equity in your home you will have to pay it, unless you go through a mortgage broker they have special "no pmi" financing, but then again all your fees and rates will go up. Also, it will cost you less in interest in the long run. Mortgage insurance is based on the amount of the mortgage and is usually $30 plus a month and that is for a cheap house! But if you need to keep the extra 10% in your pocket for emergencies, then by all means do so if you can afford to pay the insurance each month. In my opinion though, if you are financially stable and can afford to put the extra 10% down, do it! You can ask your banker for a good faith estimate and they will be able to estimate the mortgage insurance rate for you and also give you an idea how much more it will cost in the long run!

  • 1 decade ago

    Loans above 80% LTV require Mortgage Insurance or have a high interest rate.

    To stay out of Mortgage Insurance, your other option will be to do 2 loans. 1 loan at 80% and another at 10% with your 10% down. Or, an 80/10/10.

    Sometimes it makes more sense to take on Mortgage Insurance. Sometimes it makes more sense to do a 100% or a 103% purchase and use your savings to pay off credit cards or other debt.

    Ask your mortgage person to give you breakdown as to which is better...

    100%, 90/10, 80/10/10, 103% etc.

    Mortgage Insurance may not always be a bad thing. Remember, if the payment works out the same, or if taking on a 2nd is risky due to an adjustable rate, Mortgage Insurance may be the way to go. Mortgage Insurance goes away at some point. Find out about Mortgage Insurance and how to meet the terms to get it gone in the future.

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  • 1 decade ago

    Your credit score will be the primary determining factor in your interest rate as well as the rest of the credit report.

    Your down payment will only affect the amount of mortgage you will be borrowing. The more you put down the less you borrower thus your monthly payment will be lower.

    Closing cost are reflected into two categories

    #1 Recurring (Will not be affected the down payment you make)

    A. County and City (If applicable) Taxes

    B. Insurance

    #2 Non-recurring (Will not be affected the down payment you make)

    A. Escrow

    B. Title report

    C. Transfer fees

    You have to feel comfortable with the monthly payments you will have to make each month. If putting 10% down will put you in that comfort zone by all means do so. On the other hand if 20% down will place you in that comfort zone then do that also.

    I find that putting as little down as possible and taking advantage of leverage and tax advantages is a lot better. (Check with your tax consultant for tax information)

    I hope this has been of some use to you, good luck.

    "FIGHT ON"

  • 1 decade ago

    Without a 20% downpayment, you'll either have to pay mortgage insurance, a higher rate, or a higher-rate 2nd mortgage for 10% of your purchase price.

    Doing an 80/10 avoids MI, the 10% 2nd shouldn't be too much higher of a rate, and may actually save you money on closing costs, as many banks pay your costs on 2nd mortgages.

    Find a good loan officer in your area. Have them lay out the different options and see what you find.

    Source(s): 10 years in mortgage banking
  • 1 decade ago

    I will only effect your monthly payment. But, you should ask this questiojn of your mortgage broker, as every loan is diferent he/she would be able to give you the pros and cons of the 10% vs. 20%.

    My view is that you always put down as little as possible to make your monthly payments comfortable, because you can possibly find better (INVESTMENTS) to use the remaining money on.

  • 1 decade ago

    Absolutely..... It WILL affect your rate and your over all costs. PMI will now need to be paid and your rate will go up because it should - you now have less 'skin' in the game, so to speak (the lender is bearing MORE risk, you LESS ) I'm not saying don't do it, but be aware of the costs.

    Source(s): In the lending business. www.tibcap.com
  • Anonymous
    1 decade ago

    anything related to the pct that is financed will increase, rate might be higher with less down

  • Anonymous
    1 decade ago

    nope

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