Question:

How to calculate down payment on a house and what down payment options do I have if I don’t have it?

Answer:

When you are buying a house, typically you want to calculate down payment and closing costs in advance. Also, you need to know if the funds you have at hand for the downpayment will be enough for you to avoid paying private mortgage insurance (PMI).

Lenders usually want 20% of the house value to spare PMI on first-time homebuyers. Do you have 20% to put down? Multiply 0.20 by the house value. If your desired home costs $275,000 you will need

0.20 x $275,000 = $55,000 for the down payment.

What if I don't have funds to make the 20% down payment on a home purchase?

  • Best option might be to combine your funds available for down payment with some local DPA (down payment assistance program). In that case, the lender and the seller have to agree to participate. It is the cheapest way to go if you can provide some funds for down payment - the seller is usually allowed to contribute no more than 6% of the home price to the buyer's settlement costs and down payment. Your combined funds will significantly reduce the PMI premium and perhaps you won't even need it.
  • You could use lender-paid PMI, in which case your interest rate will be slightly higher. The thing about this option is that you will have to be paying this rate for the time you hold the loan. If you plan to refinance, it might not make a big difference if you are paying PMI or taking a higher rate.
  • You could agree on paying PMI and when you gain 20% equity ask the lender to cancel PMI payments. This is what most borrowers would do. When you reach certain level of equity on the home (20-22%), your PMI will be cancelled anyways by the lender if you are on track with mortgage payments.
  • Taking a second mortgage (home equity loan) to avoid PMI could be a good call. A lot of consumers used to take this route in the past - a first plus second mortgage combination is called a piggyback loan.
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