What is a Down Payment?
A down payment is the cash you provide upfront when you buy a home. It helps secure your loan, since few people can afford to pay cash for an entire property. There are some types of loans, such as VA loans, that don’t require any down payment, but in general, a bigger down payment does provide dividends.
A bigger down payment on your new home gives you a larger stake in the investment, showing lenders that you’re a better risk than those with smaller down payments. In fact, you need a minimum of 20 percent of the purchase price to put down on your mortgage. Otherwise, you may have to buy private mortgage insurance (PMI), which adds to your monthly payment, other than utilizing the VA benefits which allows 100% finance without monthly PMI
Another advantage of a large down payment is that your lender may decide to offer you a better mortgage interest rate. To be certain that you’re getting the a good interest rate on your mortgage, especially for a first-time homebuyer, find an experienced independent mortgage lender like Zachery Adam at GoPrime Mortgage in West Asheville.
Why Else Should I Put Up a Bigger Down Payment?
In addition to a possibly better mortgage interest rate without needing PMI, you’ll see other benefits of putting more upfront money toward your mortgage, such as:
- You end up paying less for your new home.
- Your monthly mortgage payment is reduced.
- You have an easier time securing a mortgage.
While you receive tax deductions from your mortgage interest, you won’t get any actual tax benefits on the amount you pay for a down payment. There is, however, an exception if you must buy private mortgage insurance.
How Does a PMI Affect My Tax Refund?
You can pay PMI for a certain number of years in advance when you close on the property. Some or all of those upfront insurance payments, , may be deductible if you meet certain requirements, including:
- The amount you pay isn’t greater than the average PMI in the area where your house is located.
- The PMI and mortgage are for your primary residence.
- You report your earnings on your tax return by the cash method, which means that you make deductions in the year they were paid.
- You didn’t borrow money to pay the points.
- The amount you paid in points is clearly defined in the closing papers for your mortgage.
- The points you list don’t pay any other closing costs, such as lawyer fees or appraisals.
While putting down a bigger down payment is the ideal way to get a better mortgage interest rate when you purchase a new home, take advantage of every avenue to reduce your costs or spread them out so that you’re comfortable both financially and physically in your new place. Contact your independent mortgage broker at GoPrime today to learn about down payment assistance to get a better mortgage interest rate.
Sources:
https://www.consumerfinance.gov/about-us/blog/7-factors-determine-your-mortgage-interest-rate/
