3 Negative Effects of a Lower Down Payment

Despite the fact that the availability of zero-down mortgages has declined significantly, there continue to be very low down payment options. For example, some conventional loans require 3 percent down, and FHA loans require at least 3.5 percent down. While these options may be available to you, should you make a larger down payment? Before you decide, you need to be aware of the effects of a lower down payment.

A Larger Loan Amount
By choosing a lower down payment, you are choosing to have a larger loan amount. A larger loan amount means that both the principal and interest charges that you pay each month through your mortgage payment will be higher. This could potentially strain your monthly budget. In addition, the total interest paid over the life of the loan can be much higher.

A Higher Interest Rate
Lenders determine your interest rate based on their perceived risk. When you choose a lower down payment, the monthly cost to you is higher. In addition, you have less equity cushion and may be more likely to find yourself in a negative equity situation. Because of these factors, the lender may offer you a higher interest rate. This results in a higher mortgage payment and more interest charges over the life of the loan.

A Mortgage Insurance Payment
When your loan-to-value is higher than 80 percent, your lender may require mortgage insurance. This is common with both FHA and conventional loans. The mortgage insurance payment is paid with your regular principal and interest payment, so your monthly housing expense will be much higher as a result.

You can see that the cost of a mortgage is significantly higher when you make a lower down payment. Do you want to compare real numbers based on your situation? You can explore down payment options in detail by contacting one of our lending reps at MortgageDepot.

Connect with one of our loan consultants to learn more.