Dealing With the Down Payment: Part 1

Down Payment Basics

If you’re a first-time homebuyer along the Front Range of Colorado, it’s important to understand your down payment options. And with median home prices rising and affordability decreasing along the Front Range, choosing the right down payment option for your situation is crucial. In the first post of this three-part series, we’ll look at what a down payment is and several down payment options.

What’s a down payment?

A down payment is a lump sum paid upfront that reduces the amount of money borrowed. The purpose of a down payment is to demonstrate personal involvement in the purchase of a home. It also protects the lender against possible losses in the event of default.

Your down payment affects your loan-to-value ratio (LTV), which is the difference between the amount borrowed and the sales price. For example, if the sales price is $100,000 and the loan amount is $80,000, then LTV is 80 percent with a 20 percent down payment.

Three Down Payment Options

3 percent (or more) down payment

Consider this option if you have limited funds for a down payment. Your down payment can start at 3 percent down, and all of these funds can be gifted from a relative. With down payments under 20 percent, the borrower pays private mortgage insurance (PMI) to insure the lender against losses in the event of foreclosure. The amount of coverage and premium are based on LTV and your credit score, with a maximum LTV of 97 percent. Payment options include a one-time mortgage insurance premium or monthly payments.

We’ve seen that the appreciation of homes in our area often outpace PMI. If you’re paying monthly, you can request an appraisal after two years. If the value of your home has gone up and the original LTV is now 80 percent, PMI may be removed (this is lender/investor dependent).

How much would PMI cost? For every $100,000 in loan amount:
With 3 percent down, PMI would be approximately $690/year.
With 5 percent down, $400/year.
With 10 percent down, $290/year.
With 15 percent down: $190/year.

80-10-10

This option is comprised of 80 percent first mortgage, 10 percent home equity line of credit (HELOC or second mortgage), and 10 percent down payment. While the advantages of an 80-10-10 include a lower down payment at closing and no mortgage insurance, HELOCs often have adjustable rates, so your payment can increase over time. HELOCs can also have a balloon payment if they are interest-only.

20 percent down payment

Known as the standard down payment, a 20 percent down payment gives the buyer instant equity in his or her home, greater buying power, and lower monthly payments. Plus, it means you don’t need to purchase mortgage insurance.

Learn about funds you can use for down payments in the second part of this series and assistance programs available for home buyers in the third part. For more information, try our mortgage affordability calculators, sign up for a complimentary seminar, or contact our mortgage team.

Author Elizabeth Million

Boulder local Elizabeth Million shares advice on home buying and mortgages picked up from the diverse roles she’s served in the real estate industry, including appraisal business owner and mortgage loan officer for Fortune 500 companies. In her current role as VP of Mortgage Lending, Liz has led Elevations to the title of largest credit union mortgage lender in Colorado.

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