Although you can make the minimum down payment, there are some real pluses to contributing more if you can afford it. For starters, contributing more to your down payment lowers the amount of interest you will have to pay, saving you money over the life of your loan.
Your loan-to-value ratio (LTV) describes how much money you owe on the home compared to how much your home is worth. You can find your LTV by dividing the amount of your mortgage by the appraised value of the home (we’ll talk more about the appraised value in a moment).
For example, let’s say you’re purchasing a home worth $100,000. If your down payment is 8% ($8,000), the mortgage company will have to pay the remaining $92,000. Therefore, your LTV is 92%.
The first advantage of a higher down payment is that it allows you to get a lower interest rate because you’re less risky to your lender. They won’t need to loan you as much money, and you’ll be less likely to walk away from the home because your money is in it.
The second advantage to putting more down is that you could avoid paying private mortgage insurance (PMI). Down payments of 20% or higher get you out of paying PMI, a monthly fee that could add hundreds of dollars to your mortgage payment. Putting 20% down may be beyond the means of many people, but even if you can’t fork over 20%, there are still benefits to putting down more than the minimum. Mortgage insurance rates are based on your LTV, so the higher your LTV, the more expensive your mortgage insurance payment will be.
In many cases, PMI will fall off once you reach 80% LTV, so you’re not stuck with PMI forever if you can’t afford a 20% down payment on a conventional loan.
Mortgage insurance premiums (MIP) on FHA loans stick around for the life of the mortgage. That being said, assuming you meet the stricter credit standards, you can always ditch the mortgage insurance payment by refinancing into a conventional loan once you reach 20% equity.
If you don’t want to pay PMI at all, you could opt for lender-paid mortgage insurance (LPMI) on a conventional loan to avoid the monthly insurance payment. In this case, you would get a slightly higher rate than you would if you chose to pay PMI on a monthly basis.