Buying a house sometimes hinges on the ability to come up with cash for the down payment. But larger down payments can also save consumers money. During challenging economic times, it helps to understand all the options before applying for a mortgage and buying a home.

There are many compelling reasons to buy a home in 2008. Prices are depressed, sellers are desperate, and mortgage interest is low and may begin to rise to fight inflation. Before signing a purchase offer, it's important to remember that one of the biggest components of buying a home is the down payment. Here are some tips on how to manage that major outlay of cash, and some insights into how down payments impact monthly finances.

The bigger the better

Size matters. The bigger the down payment, the less risk to the mortgage lender. It's also easier to get preferential rates, terms, and speedy loan approval. A 20 percent down payment used to be large, but these days, credit is tight and that amount will only get a buyer so far. Up the ante in 2008 for preferential treatment-consider paying 25 or 30 percent.

One perk of a hefty down payment is smaller monthly mortgage payments, because you're borrowing less. Paying a bigger down payment can, for that reason, help you qualify to buy a bigger and more expensive house.

By paying 20 percent down, you automatically have 20 percent equity in your home. This way, you can avoid paying Private Mortgage Insurance (PMI), which averages $25 to $75 a month. However, PMI payments are tax deductible-at least temporarily under an emergency housing rescue plan-so it may not be worth the extra down payment just to save about $50 per month.

Lower your down payment, if necessary

At the same time, if you come up with a big down payment, you may wind up depleting your savings. If you don't want to touch your emergency fund, you may have to take out a home equity loan to come up with the funds. This puts your home up for collateral, and can add unwanted risk. If you can't afford a large down payment, or anticipate that you might need to access that tied-up equity, consider paying less up front.

Many government-backed programs-like those offered to military veterans through the V.A., or to low-income families through HUD's FHA loan programs-offer low down payment mortgage options. These are an excellent alternative for those who qualify.

Some mortgage lenders allow borrowers to use cash gifts from friends and family members through down payment assistance programs. The FHA has loan programs, for example, that allow buyers to use gift funds for the entire down payment.

When push comes to shove, many who are strapped for cash turn to their retirement accounts when it's allowed by IRS rules. But financial planners rarely recommend borrowing from future retirement security, so it's best to resist the temptation to raid your precious funds.

Published on July 16, 2008