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Monday, June 21, 2010

Mortgage Basics: The Down Payment & PMI – Part 3

This is the final installment in this series on mortgage basics. We've looked at where to secure lending and how much that borrowing for a home can cost. This article will consider two other big pieces: the down payment and private mortgage insurance.

Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down--sometimes as little as five percent on conventional loans.

However, there are usually trade-offs with lower required down payments which can include larger monthly payments or a longer loan duration.

If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. PMI may add an extra $150-$300 on the monthly cost of the mortgage - something that needs to be considered.

It's important to know that the PMI usually remains in place until the borrower accrues 20 percent equity in the house, which can take several years.

When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.

• Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available.
• Ask your lender about special programs it may offer.

If PMI is required for your loan,

• Ask what the total cost of the insurance will be.
• Ask how much your monthly payment will be when including the PMI premium.
• Ask how long you will be required to carry PMI.

Was this series helpful and/or informative to you?  Please let me know!

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