Mortgages - Low Down Payments Article

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Mortgages - Low Down Payments

Low down payment mortgages could get you into the house of your dreams.

Author: Robert Thomson

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Today’s mortgage environment is much different from that of the past. One of the biggest differences is low down payment mortgages that only require 3-5% down on your total mortgage. Why exactly have mortgage down payments dropped so much recently? A substantial part of the reason why down payments are smaller is because of the sharing of risk amongst parties involved in your financial transactions. Mortgage lenders are objective institutions seeking to maximize profit and they used to require about 20% down payment on loans before they were able to spread risk to Fannie Mae. Now, with the commonplace ability to sell loans to Fannie Mae, they are willing to lower the down payment because their risk is lower.

A low down payment in the single digits may be good for you the borrower, up front, in the initial phases, however, lenders have ways by which they secure their ability to get paid in the event of default lowering their risk. One way that lenders compensate for a low down payment loan, below twenty percent of total loan value, is by requiring a borrower to pay private mortgage insurance(PMI). While private mortgage insurance is not a huge expense it is still an expense, often being .5% of your total mortgage. If you take out a $300,000 loan, then you can expect to pay about $1,500 per year in PMI insurance. These payments will be required until you reach a twenty percent pay off on your loan. However, a lender may be able to make you continue to pay even as twenty percent is breached.

Another method for obtaining a loan with very little out of pocket expense is to take out two loans at the same time. One is a primary loan to cover the main mortgage, and another is a secondary loan to cover the down payment. This is often referred to as piggy backing loans and has gained some popularity. People sometimes refer to this method of financing as taking out a second mortgage. You will essentially have two loans to pay each month, so your debt load is going to be higher. If you don't have the cash to pay a down payment, then you should carefully consider if you can service two loans every month of the year in addition to other major expenses.

By meeting certain qualifications, a person may be able to acquire an FHA loan, which only requires a 3 percent down payment. However, loan insurance is required with these mortgages to alleviate some risk, and the total loan amounts are relatively small. If you live in an area with a high cost of living these loans may not be available. Veterans administration loans can be utilized by military families looking for mortgages with lower down payments.

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