mortgage

Home financing: How much cash do I need?

The vast majority of homebuyers finance the purchase of their homes by putting down a certain amount of cash and then borrowing the rest. While cash buyers accounted for 30 percent of all home purchasers in May 2011, most people relied on home financing. There are a few mortgage programs available with little or no down payment required, but most buyers need cash for their down payment as well as closing costs, moving expenses and reserves.

Low down payment options

Many buyers choose a federally insured FHA loan for their mortgage because the down payment requirement is currently as low as 3.5 percent. Veterans may qualify for a VA, or Veterans Affairs, loan with no down payment. Homebuyers in rural areas may qualify for a USDA Rural Development loan, which is restricted by the property location and the borrowers' income.

Most state and local governments offer homebuyer incentive programs, which include down payment assistance in the form of a grant or a loan. Many are restricted by the buyers' incomes and some are also restricted to first-time homebuyers.

Conventional home financing

The down payment required for conventional financing varies between loan programs, but most require at least 5 percent to 20 percent of the home's sale price. Borrowers who make a down payment of less than 20 percent will need to take out private mortgage insurance, or PMI, and that increases the size of mortgage payments. Some lenders allow alternative ways of paying PMI, including paying some or all of it upfront at the settlement or using "lender-paid" PMI, which is financed by a slightly higher interest rate.

The down payment you make impacts your monthly mortgage payments. A large down payment reduces the amount you need to borrow, and a smaller down payment increases it. A mortgage calculator can help you evaluate various scenarios with different down payment amounts.

Whether you choose to pay cash, make a small down payment or a larger down payment, the way you finance your home should fit in with your overall, long-term financial plans. A lender and a financial planner can help you determine which choice will benefit you the most.

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