The Advantages of a Down Payment on Your House

There is something about our need to possess that creates an aversion to renting an apartment and attracts us to the prospect of owning a home. To test this for yourself, just ask yourself which option you feel more drawn to. Do you feel a particular draw toward one over the other. Most do not prefer renting, but the transition to getting a home mortgage can have significant financial effects and must be undertaken carefully so that you can understand what your best options will be.

The ideal price range on a house will be one in which you can afford a twenty-percent down payment. Aside from saving on interest payments, a twenty-percent payment eliminates the need for lenders to charge private mortgage insurance.

Private mortgage insurance is a special fee that lenders charge their customers to help reduce the impact of a default by one of its borrowers. Banks do not charge PMI to clients who have made their twenty percent payment because they do not worry as much about these borrowers defaulting, because to a certain extent they have proven their ability to meet their payment up to a substantial portion of the total loan amount. PMI payments are discontinued in light of the lower rate of risk involved in loaning to these borrowers.

For many years lenders were not compelled to notify their clients after twenty percent of the home had been paid off, resulting in unfair profits from the unwarranted fee. In recent years, legislation was based outlawing this devious practice. At the moment, PMI payments are tax deductible, which reduces their strain on homebuyers’ finances. If you cannot afford a twenty percent down payment, you should aim to make this benchmark by the year 2010. This is the year that the deduction expires and may not be reinstated. If it is reinstated you will be no worse off; if not, you will have protected yourself.

Those who are able to finance these large down payments are gaining a serious advantage over those who do not in the amount of interest that they are saving. Money paid is money you will not have to borrow, which means it is, obviously interest free. With principle high, the payments on a loan go primarily toward covering interest with little covering the amount borrowed. Prevent banks from charging you high interest by taking down the principle to a lower amount to begin with, so that you can pay more principle and less interest with every payment.

A shorter loan is required if you want to maximize the amount of principle you are paying off with every payment. In addition to more principle being financed with each payment, these also tend to have better home refinance rates than longer loans.