The Down Payment You Should Pay When Purchasing A House In Texas
Down payments are initial payments made when buying something under some form of hire purchase This means that a buyer first pays the initial installment, usually the highest amount of money, after which they can pay the rest in intermittent installments. When it comes to purchasing a house, the down payment you set aside is critical.
Lenders consider the amount that you pay upfront to be the stake you’re willing to put on your new home, hence it will influence the loan amount. The down payment also determines the probability of private mortgage insurance (PMI) as a requirement by the lender. As a rule of thumb, most, if not all lenders will require PMI if the downpayment is less than 20% of the house’s value. It also affects the interest quota. Without a doubt, the higher the down payment, the lower the rate of interest.
Evidently, there’s a lot to think about with regards to making down payments when purchasing a new home. Primarily, the amount to pay initially depends on the cost of the home and the loan program you’re working with. Normally, the amount will be anywhere from 5% to 20%, but lenders vary, and so do their percentages. Some key aspects to consider include:
1. The Loan-To-Value Ratio
The initial installment is used by your lender to calculate the loan-to-value ratio (LTV) of the home. This is one of the factors a lender considers in extending a client’s credit. They also look at debt to income ratio as well as personal credit scores in relation to the LTV. This makes the LTV an important consideration when deciding the amount of down payment to make.
The loan to value ratio is the amount you’re obligated to pay after making the first deposit on the house. It is usually represented a percentage, which is, in essence, is the ratio between the principal amount, to be paid in installments at regular intervals and the estimated value of the house. The higher the initial payment, the lower the loan amount, hence the lower the loan-to-value-ratio. In detail, it is calculated as:
loan-to-value (LTV)= Loan amount/appraisal value or purchase price (The lesser amount is used)
Consider the following scenario:
Mr. & Mrs. Smith wish to buy a house whose purchase price is $200,000 while it’s appraised value is $205,000. The former, being lower will be used by the financial institution to decide the loan amount. If Mr. & Mrs. Smith decide to pay a downpayment of $40,000, she needs an additional loan of $160,000 to fulfill the asking price. In this case, the loan to value equation will be:
loan-to-value (LTV)= Loan amount/appraisal value or purchase price so,
LTV= 0.8 which in percentage(multiply by 100) is 80%
2. Private Mortgage Insurance (PMI)
As stated before, a down payment of less than 20% requires a backup PMI. This is because the financial institution stands to lose a lot in case you decide to default the loan, having financed an impressive 80% and above of your purchase. With an LTV as high as this, the lender is investing a tremendous amount, and to protect their risk, comes the insurance. Paying PMI, in turn, increases your monthly installment amounts.
Before deciding on the down payment for the property, assess the pros and cons that come with lending institutions. Would you rather pay a private mortgage insurance every month, even without knowing whether you’ll manage to be a homeowner in the long run, or does it make more sense to wait till you have a surmountable amount to pay as a down payment? With these two financial aspects to consider, the ball is in your court.