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Mortgage Down Payment
A down payment on a home is very important to the bank. The ultimate goal is to put down 20% of the homes value so you can avoid PMI (Principal Mortgage Interest). Obviously a lot of people don't have the 20% down but my object is to tell you about its importance to the bank. Why do they always ask for so much? Is it really easier to get approved if you have more?
Assume you're the bank loaning money out. You have $100,000 and you want to make money off of it so you loan it to a friend to collect interest. They checked the current interest rates and used a mortgage calculator to see what he can afford per month. They plan on buying a home with it and the home costs exactly $100,000. Now let's assume, not long after, your friend stops paying the mortgage, you foreclose on them and want to sell it to get your money back. So you still manage to sell it to another person for exactly what your friend paid for it. You get your $100,000 back but have to pay real estate commission and transfer of ownership fees which add up to about 5%. That means you would have to pay about $5,000, which means you lost that much over all.
Now let's go back to the 20% down payment idea. The bank wants 20% down to start which means they're only loaning you $80,000 and the home is still worth $100,000. The idea is that the bank will have a hard time losing money on that deal. So as long as your credit checks out alright and you can cover the monthly mortgage payment then you'll probably be approved.
What Is PMI?
PMI is called Principal Mortgage Insurance. Like I already said, if you don't put down 20% you have a much stronger chance of losing money on the deal. So PMI is insurance you pay in case you fault on the loan. Not that many people will do it, but the bank collects enough PMI over all to cover their loses.
Overall a down payment is a very important piece of the puzzle. Anything you can put down at all will help minimize the chance of loses with the bank and they'll be more apt to loan you the money. Use a free mortgage calculator on my site to help you make an informed decision before opting into buying a home. Try to save up that 20% down payment.
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