The Best Way to Do a Mortgage With Only 15% Down

Answer

The process of obtaining a mortgage in order to purchase a home is a game of numbers. How much property can you afford? How much cash do you have put up for a rainy day? Do you have access to any extra cash that might be used to meet closing fees as well as reserves? After you have responded to those questions and determined what you have left, a down payment of 15% is still deemed acceptable and will get you a decent interest rate. This is the case even if you have less than that. However, if you enter the market with a down payment that is lower than twenty percent – unless you and your mortgage lender are really astute – you will face certain disadvantages.

Tip

Compare your options. If you want to obtain the greatest price possible, you should talk to at least four different mortgage providers. You may cut at least half a percentage point off of your interest rate by compiling a spreadsheet of all of the expenses associated with borrowing money and selecting the option that is most beneficial to you.

Get a Government-Backed Mortgage

It is possible to acquire a loan from the Federal Housing Administration (FHA) or the Veterans Affairs (VA) with no down payment at all. However, you shouldn’t believe that they’re handing anything out for free. A lower down payment might result in a higher interest rate, private mortgage insurance premiums (PMI), and other financing expenses. You are going to have to make restitution in some form or another. If you do all in your power to raise your down payment for an FHA loan up to the maximum of 20 percent, you may avoid paying private mortgage insurance (PMI), which lasts for the entire term of the loan and costs around 0.85 percent of the mortgage each year. You’ll also pay an upfront mortgage insurance payment. Once your equity in the home drops to 78 percent or below, the only option to get out of having to pay for FHA mortgage insurance is to refinance out of your FHA loan and into a conventional loan. The VA does not require borrowers to pay for mortgage insurance; nevertheless, lenders do add on a high loan cost. Borrowers who take up FHA or VA loans are permitted to utilise gift money for their down payments and other associated charges.

Shop for a Conventional Loan

A conventional loan comes with greater lending criteria, but it also comes with less commitments, in comparison to an FHA loan, which has lower lending standards. A reasonable interest rate may be obtained with a down payment of 15 percent of the purchase price; however, mortgage insurance will still be required of you, although it will not be required for the whole duration of the loan. And the rate of private mortgage insurance (PMI) for conventional loans is lower than the rate for FHA loans. Your private mortgage insurance policy may be cancelled whenever the equity in your home reaches 78%. You will incur expenses for the appraisal performed by the lender; but, you will recoup those expenses in a matter of weeks or months. You are permitted to make use of gift money for the down payment under the standards of conventional financing.

Time to Get Creative

If you can only afford a down payment of 15 percent, your lender should be able to show you how to avoid having to pay for mortgage insurance. One option is to get a first mortgage in addition to a second mortgage rather than acquiring a single mortgage on its own. Your expenses will be greater for the second mortgage, but this may balance what you’d pay in PMI, at least until you’ve hit the 78 percent equity threshold and can combine the two mortgages into one payment. Your costs will be higher for the second mortgage. We may count our blessings that the Tax Cuts and Jobs Act of 2017 maintains the ability to deduct interest paid on second mortgages on private first or second homes up to a certain limit.