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How Much of a Down Payment do I Need to Purchase a Home?

These days, you do need a down payment to purchase a home, however, the actual amount will vary from person-to-person.

What is the recommendation?
It is recommended to put down about 20 percent or more of the cost if you have that amount of money available. This is known as 80 percent loan-to-value ratio (LTV). If you put down less than this you will be required to pay private mortgage insurance (PMI) which protects the lender in the event you default on the loan. PMI is not tax deductible and can cost anywhere from $25 to $65 per month for a $100,000 loan. It's determined by the size of the down payment, the type of mortgage and amount of insurance. Monthly PMI is paid with the mortgage. Remember that under the federal law the lender is required to cancel the PMI once the LTV ratio reaches 78 percent or, in other words, when your mortgage amortized to 78 percent of the original value of the house. The borrower must be current on all mortgage payments and the lender must tell the borrower at closing when the mortgage will hit that 78 percent mark.

Some lenders may require this 20 percent to be put down in order to get a loan. You can be turned down for a loan if you are not able to come up with the 20 percent the lender requires. In some areas of the country such as the New York tri-state area and the San Francisco Bay area, where homes for even the first time buyer are every expensive, 20 percent can be a large amount of money. Starter homes in these areas can cost $300,000 or more.

Federal Loans:
For Federal Housing Authority (FHA) loans, you may only need to put down as little as 3 percent of which 2 percent can be a gift from a friend, relative or non-profit organization. However, you will need to pay PMI on this loan.

A new development is that nontraditional lenders are jumping into the mortgage game. Many of these are investment companies such as Fidelity. They allow you to borrow on a margin, which basically means you are essentially using your brokerage account as collateral for whatever you are buying. Your brokerage account may be your retirement account or investment assets you don't wish to sell in order to come up with down payment cash. If you accounts are with other financial institutions, investigate if they offer this option.

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