When to Put Money Down on Your Mortgage

A mortgage with no money down may be a mixed blessing.
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While it may seem impossible to get a mortgage without putting any money down, some loans, such as VA and USDA loans, still offer a no down-payment option. Being able to purchase a home without putting any money down may seem like a good option, but that is not always the case. Putting money down on your mortgage reduces your monthly payments and may help you qualify for a better mortgage.

Avoid PMI

When you take out a loan for more than 80 percent of what your home is worth, mortgage lenders require you to pay private mortgage insurance. PMI gives lenders security by protecting them if you default on your mortgage. You pay PMI on top of your regular mortgage payment until the balance of your loan falls below 80 percent of your home's value. Putting money down on your mortgage helps you avoid paying PMI or reduce the amount you pay in PMI.

Get Lower Monthly Payments

The amount that you put down on your home reduces the amount of your total mortgage. A lower mortgage amount reduces the size of your monthly payments. For example, a $150,000 home with no money down and a 5-percent interest rate on a 30-year mortgage will have a monthly payment of around $800. That same home with 20 percent down will have a monthly payment of around $650 and no PMI. By putting money down, you may also qualify for lower interest rates, which will reduce your monthly payments even more.

Buy a More Expensive Home

If you have a significant amount of money saved, but have a limit on the monthly mortgage payment you can afford, putting money down on your mortgage may get you into a more expensive home, without going over your monthly budget. For example, if you can afford the monthly payment on a $200,000 home and you have around $50,000 to put down on a home, you will be able to purchase a $250,000 home for around the same monthly payment. Having money to put down can also increase your chances of getting approved for a mortgage on a more expensive home because it reduces the lender's risk.

Build Equity in Your Home

When you put money down, you build instant equity in your home. Aside from cutting the amount of interest you pay and not having to pay PMI, having instant equity in your home helps you avoid having to sell your house for less than you owe if you ever have to sell your home in a weak housing market. Should your home need repairs later on, or you have other expenses you need to take care of, you can tap that equity with a home equity line of credit.

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