The down payment is perhaps the biggest roadblock to homeownership in Kentucky. With the exception of the VA loan and USDA loan in Bowling Green, Plum Springs, Woodburn, and the rest of the state, most of the other mortgages on the market would require some money down.
While there is no denying that building up a nest egg to cover your share of responsibility for the property’s price for a long time is inconvenient, it is not an unnecessary requirement. So, why do you really need to pay a down payment when taking out a mortgage? Below are four practical reasons:
Gauging Your Capacity to Manage a Major Financial Obligation
If you can’t meet the minimum mortgage down payment requirement, you are probably not ready for the largest debt of your life.
Saving up for a down payment will test your financial discipline, challenge your income potential, and hone your budgeting skill. The moment you come up with enough funds to satisfy the loan-to-value ratio policy of your prospective lender is a milestone in your journey toward homeownership.
Lowering the Risk for the Lender
Being able to pay a large down payment sends a strong message to the lender. It indicates that you are capable to set aside enough money regularly, which is a testament of sound personal finance management.
Moreover, it reduces the amount of money your lender has to loan you to complete your property purchase. By entering the deal with less risk, the other party could be more inclined to offer you a lower interest. You might even be allowed to access more funding in order to buy a bigger house if you wish.
From a lender’s point of view, the more cash you put down, the less likely you will default on your mortgage. A sizable down payment raises the stakes, motivating you not to be delinquent in order to keep your home and lose the sum you parted ways with after closing the deal with the property seller.
Building Home Equity Fast
Home equity is what you own in your property. If you pay a 10% down payment and borrow the remaining 90% of the funds from a lender, you technically just own one-tenth of your house. Since the principal balance of the mortgage is tied to equity, you can grow it more quickly if you shoulder a higher portion of the property’s sale price and borrow less money.
Avoid Private Mortgage Insurance
Also known as PMI, this insurance is designed to protect the lender against any financial loss if the borrower default on the loan. This cost applies when you pay less than one-fifth of the property’s price upfront. It is included in the monthly payments until your home equity reaches 20%.
On average, the PMI is equivalent to 2.5% of the mortgage. However, it could go up depending on the value of your property, your creditworthiness, and the size of your down payment. You might have to pay a portion of the premium at closing. No matter how you slice it, you should make every effort to avoid PMI to reduce the real cost of your mortgage.
Regardless of how you feel about the down payment, you can’t deny its utility. If you wish to still skip it without dealing with most of the consequences of financing your house 100%, study the few zero-down mortgages left on the market.