| By :
Nick Messe
The recent difficulties experienced by the real estate and mortgage lending industries have resulted in an outbreak of new rules and regulations making it harder for potential home buyers to qualify for mortgage loans. New laws, such as HR3221, have affected down payment requirements and other lending guidelines regarding mortgage loans and home loan refinancing. If you are a potential home buyer, how do these tighter guidelines affect you, and is it better to still make just the minimum down payment or to try to make a larger down payment? During the real estate boom years, down payment requirements were much more relaxed on mortgage loans, mortgage equity loans and home loan refinancing options. Home buyers could qualify for most mortgage options with just a 5-10% down payment. These relaxed guidelines, however, contributed to the recent decline of the real estate and lending markets. As real estate values dropped, home owners found themselves trapped in mortgages they could no longer afford. Partially due to low or no down payment mortgages, home owners found themselves owing more on their home than they could sell it for, and mortgage products such as subprime loans and adjustable mortgages resulted in ballooning monthly payments. Home owners were trapped in homes they couldn't sell with payments they couldn't afford. Today, many lenders require a down payment of 20%. Making a 20% down payment may not be a realistic option for many potential home owners, though. One survey of current homeowners found that almost half of the home owners who responded said they would not have been able to come up with a 20% down payment when they purchased their home. This, of course, is bad news for lenders, potential home buyers, current home owners, especially those looking for home loan refinancing or mortgage equity loans, and the real estate market in general. Currently the mortgage option of choice for those looking for a small down payment is an FHA loan. FHA loans require only a 3.5% down payment, although there is a push to increase this requirement to 5%. As other lending options have increased their down payment requirement and FHA loans have become the best option for low-down-payment loans, market share for FHA loans has increased from 2% to around 35%. So, is a bigger down payment better? Making a 20% or bigger down payment gives potential home buyers more loan options to choose from. On any given loan product, a bigger down payment can also mean a lower interest rate for the borrower. Bigger down payments also result in savings over the life of your loan on monthly payments, interest paid and avoiding private mortgage insurance. When deciding how much to put down on your mortgage loan, mortgage equity loan or mortgage refinance, ask yourself if a larger down payment is right for you. On a 30-year fixed-rate mortgage for $400,000 at 7%, a 20% down payment versus a 10% down payment would save about $75,000 over the life of the loan. Would putting $80,000 down instead of $40,000 leave you enough for the other expenses of home ownership? Could you get a better return on your extra $40,000 by investing it elsewhere? Would you actually invest it elsewhere or would you just spend it? Home ownership remains the largest investment most Americans make in their lifetime, and even a small difference in the terms of your mortgage loan can mean thousands of dollars in savings over the life of your loan. Consider your options as well as your personal financial habits carefully when deciding what makes the most sense for you.
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