One of the biggest challenges in buying a home is often the need to have enough money put by for a down payment.
A down payment is made by the buyer at the beginning of a home purchase to show commitment to the transaction. It's usually a percentage of the total price of the home and is paid through a wire transfer. This payment is immediately applied to the buyer's equity position in the property.
The general rule of thumb is that buyers need to find 20% of the value of their desired residence. In practice, there are a wide range of alternative options, especially for first time buyers. However, many home buyers are in the fortunate position of being able to pay at least the minimum down payment requirement.
Those who find themselves in this enviable position need to carefully evaluate the benefits of using a good chunk of their own money to reduce the amount they borrow:
- Clearly, the more you put down at first, the lower your monthly payments are going to be and you will probably save many thousands of dollars in interest that doesn't need to be paid over the life of the loan.
- Lower loan to home value ratios often attract better interest rates from lenders. This is largely because the perceived risk of you being unable to pay off the loan is greatly reduced. Again, another potential way to save an awful lot of money over the years.
- Borrowing less means that, at times when home values drop, you are much less likely to be in a negative equity or "underwater" position, whereby the amount you've borrowed is possibly greater than the value of your home. Clearly, the larger the down payment, the more certain you can be that you'll never encounter this worrying situation.
- If only we all had a crystal ball and could see what the future holds for us. Sadly that isn't possible and a substantial down payment means that you will probably significantly reduce your monthly outgoings, enabling you to more easily ride out an unforeseen personal financial crisis, due to job loss or a range of other monetary pressures, including long term illness.
- Although you may be reducing your personal savings in the short term, you are essentially reducing your financial commitments long into the hard to predict future. This will give you a lot of freedom in terms of how you spend and invest your money and, maybe even more importantly, you will sleep at night with enhanced peace of mind.
At Everest Peak Realty, we have excellent relationships with the best financial advisors in the Albuquerque area and often work closely with them to create the best home purchase/financing package, tailor made to your individual circumstances. Why not call us today and explore your options.