Coming up with a down payment is only half the challenge for homebuyers. Deciding how much to pay can be just as difficult, because of the significant financial consequences.

Most buyers should start saving for a down payment long before they begin shopping for a mortgage, because down payment requirements are substantial. The funds that you use have to be in your account for a relatively long period of time, or lenders won't accept them. They want to ensure that that the money is really yours, and not just parked in your account to make you look more financially stronger than you actually are.

Even after coming up with money, there are plenty of pros and cons regarding mortgage down payment strategies, and almost all of them depend upon your unique financial situation. In general, you should pay as much as possible to gain the benefits of a large down payment, while also taking care not to go beyond your own financial comfort level.

Down payment considerations

Here are a few things to consider before you make the down payment:

  • If you pay less than 20 percent down, you'll probably be required to pay a heftier monthly payment that includes a premium for private mortgage insurance (PMI). This kind of insurance doesn't benefit you, but protects your lender in case you stop making payments.
  • If you pay more than 20 percent, you run the risk of tying-up all your available cash. If you need money down the road, you'll have to take out a second mortgage.
  • By paying more up front, however, you improve your chances of getting a more favorable interest rate- even if you don't have excellent credit. This could save you thousands of dollars during the lifetime of a mortgage.
  • Moving costs money, so don't overextend yourself by putting all your available cash into your down payment. You'll also need a savings cushion to take care of unexpected homeowner expenses, like the repair or replacement of a roof, heating unit, or other critical item.
  • On the other hand, the more you put toward your down payment, the greater your equity. Putting down little or nothing makes you vulnerable, because even a slight slump in prices could leave you owing more than your house is worth. That's a risky situation that sometimes leads to defaults and foreclosures.

Every down payment decision is a personal and individual one, based on the buyer's particular circumstances. Before committing funds, evaluate all your options with an experienced loan officer who can answer your questions as you consider various possibilities.

Above all, don't spend money on a down payment unless you can afford it. Doing so will only cause stress on your budget. Pay what's comfortable, and then enjoy your new home with peace of mind and financial stability.

Published on January 29, 2008