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Do I Need a 20 Percent Down Payment to Buy a Home?

February 4, 2021

Couple sitting on the couch putting a down payment on a home

Get a Down Payment That Fits Your Budget With the Help of Homestead Financial Mortgage

The thought of needing to save 20% of a home’s purchasing price for your down payment is an intimidating one, but there’s no need to fear. In almost every case, you don’t actually need 20% down to get a mortgage, and one with a great rate at that! Don’t let this common misconception stop you from becoming a first-time home buyer. There are multiple mortgage types that require a down payment far below 20%. Let Homestead Financial Mortgage walk you through the process of financing your first home with an affordable down payment option.

When you work with a lender like Homestead Financial Mortgage to reach an agreement on a home loan, you’re taking out a mortgage. With a mortgage, the creditor or “lender” will loan you the money you need to finance the purchase of your home. To uphold your end of the agreement, you will make monthly payments that include interest on the loan amount. The name of your lender will be on your home title until your mortgage is paid in full. When you’ve paid the loan and the interest for your home, the title will transfer to you and the home is all yours!

If you’re a first-time home buyer, you should know that a 20% down payment is not a requirement to purchase your new home. One of our knowledgeable loan officers will help you choose the mortgage option that works best for you and your budget. Below are just two of the many affordable financing options your Homestead Financial Mortgage loan officer can tell you about.

Fixed-Rate Mortgage

Almost everyone has heard of fixed-rate mortgages. But  let’s explore what that actually means. Whatever amount is left after you pay your down payment on a home is the amount that you’ll borrow from a mortgage lender. That amount is called the principal. The mortgage interest rate that your lender charges as you pay off your home loan is multiplied by this amount, so interest expenses can really add up. That’s why a fixed-rate mortgage is a great solution for so many first-time home buyers.

With a fixed-rate mortgage, the interest rate is always the same. Whether you’re making a payment on your home loan in year one or year ten, you’re paying the same interest rate. Your monthly payment will be equal to the amount of your interest rate multiplied by the amount of your principal, plus a small percentage of the principal itself. That means that every month you pay off a little more of your principle and every month the interest rate is multiplied by a smaller number. The result is a monthly interest payment that goes down over time.

To recap: with every payment you make, the principal of your loan (remember, that’s the value of the home that you’re borrowing from a lender) decreases. With less principal to pay, the total amount of interest is also less. At the start of your loan repayment period, you’ll mostly be paying interest expenses. As you approach the end of the life of your home loan, payments will mostly go toward the principal. Through this whole process, the interest rate stays the same.

You’re not alone on your home buying journey. An incredible 85% of home buyers choose to finance their home with a fixed-rate mortgage, and most choose a 15-year or 30-year fixed mortgage for their financing. The 30-year fixed-rate mortgage is your most affordable option. Your monthly payments will be lower on a 30-year plan than on a 15-year one because they’re spread out over a much longer period of time. A 30-year fixed-rate mortgage is a great option for the first-time homebuyer who plans to stay in their home for a long time. It’s also a great fit for families looking for an affordable monthly payment on their new home.

FHA Loan

Are you still building your credit? Is your credit less than perfect? An FHA loan may be the right mortgage solution for you. The U.S. Department of Housing and Urban Development runs the Federal Housing Administration (FHA). FHA loans come with a partial backing from the government so that your lender can give you a better deal on your home loan. FHA loan requirements are ones that you are sure to be able to meet. An FHA loan offers more broad acceptance standards so that a first-time homebuyer like you can qualify for a loan with as little as 3.5% down.

In return for financing options with low down payments, low closing costs, and easy credit qualifications, FHA loans include the upfront cost of a mortgage insurance premium, or MIP, which acts as a form of insurance for the FHA. With an FHA loan, there’s no need for a 20% down payment, thanks to the MIP you’ll pay instead. There are two ways to do this. If you choose to pay the MIP in installments, an annual MIP amount will be assessed every year and billed on a monthly basis. Your other option is to pay the MIP on your FHA loan up front. In this case, the FHS will calculate your MIP at the time of your closing and bill it in one lump sum.

Homestead Financial Mortgage has loan officers standing buy who want to clear your path to home ownership. Whether it’s your first home or your fourth home, it should be an asset to you and your family, not a daunting financial burden. Don’t worry about that 20% down payment myth. Homestead Financial Mortgage is going to make sure that your home buying experience is one that is simple and affordable. Get started on your mortgage preapproval application online today! Once you complete the simple form, one of our knowledgeable mortgage loan officers in your area will be in contact within 24 hours.

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