How to Find the Right Mortgage Down Payment Option
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By Marcie Geffner
So you're thinking about buying a home. Whether you're a first-time home buyer, a homeowner hoping to upgrade, or a budding real-estate investor looking to purchase your second or third home, there's probably one question at the top of your mind: Can I afford the down payment?
It can seem like a real challenge—traditionally, lenders have required 15 to 20 percent of the sales price up front, and with Hawaii's high cost of living and competitive real estate market, that can add up to a significant chunk of change. But not to worry—these days, there is an entire range of options when applying for a home loan, and how much you'll need for a down payment can vary widely.
Some loans require just 3, 3.5 or 5 percent down, or even zero down. Of course, there are trade-offs. Though some people buy without a down payment, for many, a down payment is desirable even if it's not required, says Desiree Julian, Senior Loan Officer at Bank of Hawaii in the West Oahu Lending Center.
That's because you'll get a wider choice of loans and a lower rate for the type of loan you choose if you put some money down. It may also be easier for you to qualify when you make a down payment. Plus, if you choose a conventional mortgage and your down payment is at least 20 percent of the sale price, you won't have to pay for private mortgage insurance, an extra expense that protects your lender in case you don't make your payments.
This sample worksheet can help you make your own assessment, based on your personal situation.
If You're A First-Time Home Buyer:
Being raised in the Islands, where families are close and family values are strong, means that some first-time home buyers receive a down payment as a gift from a parent or grandparent.
For others, finding a down payment means doing it the old fashioned way by saving up a down payment over time. Start up a savings account specifically dedicated to a down payment, and set a goal of how much you want to save, as well as how much you're able to set aside each month. Make steady progress toward your target, and you'll hit it before you know it!
Still, for those that may need some extra help, Government down payment assistance programs are available. The U.S. Dept. of Housing and Urban Development lists county-level programs throughout Hawaii.
If You're Upgrading:
If you already own a home, and want to upgrade to a new residence, you have additional options, because you can use the equity you've built up in your current property as the down payment on your new property.
Equity is the difference between the home's value and the mortgage balance, and typically increases over time if the home appreciates while the homeowner makes monthly loan payments. Using equity as a down payment can help homeowners transition into a larger loan, so they can buy a home that's bigger or more desirable.
If You're Buying An Investment Property:
Buying a second or third home as an investment typically requires a higher down payment than a primary residence . The down payment percentage depends on the property type and your credit history, among other factors. A good guide can be found at Fannie Mae, which provides an eligibility matrix showing down payment requirements of 15 percent to purchase a single-unit investment property and 25 percent to buy an investment property with two, three or four units. There are exceptions to this matrix, however.
So, where do you secure the down payment for this second home?
The answer may be as easy as your primary residence. You may be able to refinance to lower your mortgage payment, cash out equity or get a home equity line of credit (HELOC), which can cover a down payment.
A cash-out refinance can tap up to 80 percent of the current home's value. A HELOC might go up to 85 or 90 percent of the value.
These are just a few of the options available for securing a down payment for that dream house. Of course, mortgages and down payments are always going to be a complex issue, but there's no need to be intimidated. For help navigating the whole home-buying process, talk to a residential loan officer to learn more about what solutions work best for you.
Marcie Geffner is an award-winning freelance reporter, writer, editor and book reviewer with more than 15 years of experience. She specializes in real estate, housing, commercial property, banking, small business, the U.S. economy and healthcare.