Low down payment loans are touted as beneficial for people who want to own a home in Philadelphia but don’t have a lot of money saved up or have a good credit score. It’s estimated that FHA, Fannie Mae and Freddie Mac guarantee around $7 trillion in mortgages. This number demonstrates the popularity of the government-backed mortgage program. But a low down payment mortgage has burdens that a traditional or conventional mortgage doesn’t have. It may be worthwhile to save for a traditional mortgage and save money on your home over the long run. Here’s a look at why.
Costs Add Up Over Time
A low down payment loan is guaranteed by the federal government. That is, if the person who takes out the mortgage defaults, the federal government pays the lender the remaining balance of the loan. In turn, the FHA charges mortgage insurance to the loan holder as a hedge against default. The cost of the insurance adds about $250 to the monthly mortgage payment on a $350,000 home. And that’s on top of the upfront mortgage insurance that is paid at the time of loan origination. You have to pay the mortgage insurance premium for 11 years on average, but some mortgages require you to pay it for the entirety of the payment period.
A low down payment loan helps you get onto the homeownership ladder, but it can cost you more over the life of the mortgage. If your financial picture improves, you may be able to refinance into a traditional mortgage. Talk to a broker at a Philadelphia mortgage company about a long-term financing strategy for buying a home.
A Traditional Mortgage has More Requirements but Can Cost Less
A traditional mortgage is one that requires a sizable down payment which is typically 20 percent of the cost of the home. If you want to buy a home that costs $350,000, you need to have $70,000 in the bank for the down payment. However, 20 percent down is not a stringent requirement. Many lenders will issue a traditional mortgage with less than 20 percent down although you still need a lot of money saved up even for a lower percentage. It’s a big hurdle to overcome as it can take a long time to save up enough money.
It’s not unusual to look at the monthly cost of the mortgage as your baseline for ownership as opposed to how much you pay in interest over the life of the mortgage. Knowing how much you can afford on a monthly basis makes it easier to figure out how much home you can buy. What you may not be aware of is that interest can add a significant cost to ownership of the home. Interest isn’t something you can avoid, but you can pay less of it over time if you put more money down on your home.
Get the Loan That Makes Sense for You
The best type of loan is a traditional mortgage with as much of a down payment you can put together. But it’s not always the right kind of loan for everyone. Your credit score plays a role in your eligibility as does your income. Talk with an agent at a Philadelphia mortgage broker about your options. The mortgage market is full of financing options designed to meet many kinds of financial situations. There may be a loan product that has standards and requirements that fits your finances.
Don’t talk yourself out of buying a home simply because you don’t think you’re a good fit for a lender. Options are plenty, and you can take advantage of upswings in fortunes by refinancing an existing mortgage. Talk to a Philadelphia mortgage broker about what’s available and what can work for you.