Questions About Home Financing? Here's Help.

The following is a blog by Chip Poli.

You are ready to hit the pavement in search of your first home. There are several questions that keep you up at night. Here are the answers to three of them. Hopefully, this will make you sleep easier.

1. What is a down payment?

A down payment is the money you personally lay on the line towards the purchase of your home. Very few home buyers have the cash available to buy a home outright. Most of us will need a mortgage. Even with a mortgage, you will need to raise the money for a down payment so the lender knows you have a financial stake in the purchase.

2.   How can I acquire a home with as little as 5% down?

Most lenders now offer mortgages for new homes with a variety of down payment options which can be 5% or less.  Low or no down payment mortgages are typically insured to cover potential default of payment, and the carrying costs (the net amount of expenditures put up by the buyer) of the mortgage is therefore higher than a conventional mortgage because they may include the insurance premium. With all low down payment insured mortgages, you are responsible for appraisal and legal fees, the payment of private mortgage insurance, and the application fee for the insurance. Getting a home with 5% down or less is a wonderful opportunity, but keep in mind that you will be paying PMI until you have a 20% investment in your home. For example, if the purchase price of your home is $300,000, and you put $15,000 down (5%), you will pay PMI until you reach $60,000 (20%) in equity in your home through an increase in the market value of your home (determined by an appraiser) or as you put more money towards your mortgage each month. 

The amount of the down payment, which can range from 0 (VA mortgages for Veterans) to 20 percent, is in place so you have a financial stake in the home mortgage. The more you put down up front, the less your home costs in the long run.  

3. Once I am in my home,how can I pay off my mortgage quicker?

There are several ways you can do this. You can pay on a non-monthly or accelerated schedule. Paying bi-weekly, instead of monthly, can cut a significant number of years off a mortgage. You can increase your payment frequency schedule and pay weekly, or if you come into a large sum of money you can put it towards the mortgage principle thereby reducing the amount you owe in a shorter period of time.