The best mortgage for a low down payment is those with a rate of 6% and below. The benefit of a low down payment to the buyer is that they are able to keep their cash liquid and therefore able to comfortably tackle life circumstances that might require urgent cash in the near future. These types of mortgages are offered by FHA Loans, VA Loans, USDA Loans and Conventional Loans. FHA Loans and Conventional Loans mean additional charges of private mortgage insurance since they are below the threshold of a 20% down payment rate.
The down payment your can afford will impact your mortgage monthly payments. In order to get the best deal possible, it is also important to pick the best mortgage rates out there.
What is a Down Payment
A down payment is a payment made in cash when purchasing a home. It is usually a percentage of the full purchase price. It may or may not be refunded if the deal falls through. In most cases, the buyer usually covers the remaining amount of the purchase price with a loan. A majority of the home buyers pay a down payment of 5 to 25% of the total value of the home and the rest is covered by a mortgage loan.
The down payment decreases the amount of interest the buyer will have to pay and lowers the monthly payments. It also offers the lenders some degree of security since a buyer who has paid the down payment is less likely to default on the loan. With this assumption, the leader is most likely to offer a low rate of interest for borrowers with a large down payment. If the amount of down payment is less than 20%, one has to purchase mortgage insurance (PMI) from a private insurance company and pay PMI premiums. The aim of the insurance is to protect the lender in case the buyer defaults on the loan. The average down payment made by first-time home buyers is 6% according to the “National Association of Realtors Profile of Home Buyers and Sellers”. Therefore, the best low down payment mortgages are mortgages that offer a 6% down payment and below.
How to Find a Mortgage for Low Down Payment
There are a variety of low-down-payment mortgages available that require few requirements for one to qualify to be offered the facility. Some of the requirements that one has to have in order to qualify for the mortgage are a minimum credit score, homeownership education for first-time buyers, should not own another property at the time of purchase and other mortgage facilities exclude student loan debt from payment ratio.
Mortgages for low down payments enable the buyer to use their money elsewhere where it might attract bigger returns or pay other debts and increase one’s savings in the long run. It is important to note that just because the mortgage attracts a low down payment, does not necessarily mean that the decision is wise. You may end up paying a higher interest rate over the period of the loan and be charged other extra fees, pay private mortgage insurance and have less equity upfront thus being unable to access home equity loans when in need of credit. It also increases one’s chance of being underwater in their own home (owing more than what the home is worth) in the event that the market crashes.
Another important thing to consider will be the monthly payments to pay back your mortgage. As these may determine too how much down payment you can afford at the time of purchasing.
Refinancing Your House Won’t Require Down Payment
Refinancing your home loan usually doesn’t require any money from you. Some refinancing lenders may ask for some cash back after the loan closes. If you have a lack of equity in the home or you’re paying off debt to qualify, you may need to provide cash for the loan to close. If you already own a home, maybe refinancing is a good option to lower your monthly payments and get the cash for the down payment for a second house.
Best Mortgage for Low Down Payment
The best mortgage for buyers with a low down payment are the following ones:
- FHA Loan is the government-backed Federal Housing Authority. They require a minimum of 3.5% down payment. These loans require an additional requirement of private mortgage insurance since the down payment rate is below 20%. These mortgage insurance premiums are paid for until the loan is cleared.
- VA Loans are for veterans and military families. They require a 0% down payment and have no private mortgage insurance.
- USDA Loans also known as the Rural Housing Loans, are meant to assist low to moderate-income households within the eligible areas that are in need of housing but are not able to qualify for other loans. They require a 0% down payment and have no private mortgage insurance.
- Conventional Loans: Some require as little as a 3% down payment. There is an additional requirement for private mortgage insurance.
