Acquiring financing in these tumultuous times is probably the freakin’ scariest aspect of purchasing a home, or at least it will be for this Debt Ninja. If you are looking for financing or refinancing for your home, whether looking at an FHA mortgage, jumbo mortgage, VA mortgage, or a reverse mortgage, make sure to research the crap out of the various lenders so that you can take advantage of the lowest mortgage rates available.
Most conventional mortgages, with an affordable interest rate, typically require a down payment of anywhere between 5-20% of the purchase price. That can end up being a hefty chunk of change, but the general rule of thumb is choose the largest down payment plan you can afford- if possible 20% – with closing costs that equal up to about 3% to 5% of the purchase price, but you better make darn sure you have enough money left in your savings account to cover three to four months worth of housing expenses. A larger down payment will reduce the size of your loan, start you off with a lot of equity upfront, and possibly allow you to avoid paying private mortgage insurance. All around a pretty sweet deal if you ask me 🙂
There is also the option of getting a mortgage with little or no down payment. Before the housing market crash, lenders were increasingly willing to finance as much as 95%, 97% ,or even 100% of the home’s value. Essentially you could be broke, but still buy a pretty sick house. Generally speaking, the larger loans have higher interest rates than smaller loans. Why? Because mortgage lenders consider these highly risky (aka sketchy) loans. The borrowers may not only have to pay a higher interest rate, but they will also be stuck paying for the private mortgage insurance. Basically this is a pretty terrible option and I wouldn’t recommend using it, but I got to state the facts and this does work for some people.
Pretty much the only benefit to the larger financing options is the fact that it allows families with low or moderate incomes to be able to enjoy the life of homeownership…that is until they get foreclosed on for buying something they can’t afford. The recent housing market collapse, has left us all asking “Should someone that can’t afford to put down 10% on a home, be allowed to purchase one at all?”