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The Advantages of a Down Payment When Buying a Home

Updated on June 13, 2009

The traditional mortgage has been a popular way to allow a person to purchase a home, even if they do not have enough money to pay for the home upfront. Mortgages first became popular following the Great Depression and most lenders required a down payment of at least 20%.

The 20% down payment would remain the standard for over 50 years, until recently when lenders relaxed their standards and began to require lower down payments or sometimes no down payment at all. Today, the credit market has begun to tighten again due to the current financial crisis and collapse of the housing market, so most lenders are beginning to move back towards the traditional requirements of 20% down.

Even though most lenders are now requiring a much larger down payment, there are actually a number of other reasons that saving for a down payment is a good idea.

Down Payments Mean More Options and Better Interest Rates

One of the biggest benefits of having a down payment is that it offers the borrower a much greater chance of getting a good home mortgage. There is a better chance the bank will be willing to offer a low interest rate and favorable terms if you have a down payment.

Even just having a 3% down payment can make the borrower eligible for a Federal Housing Administration(FHA) Mortgage, so having some money to put down towards the cost of the home will almost certainly guarantee more favorable mortgage terms.

Today, the interest rate is the lowest it has been in a long time, so it is possible to get some really great deals on a mortgage, but in order to avoid a subprime mortgage and take advantage of these incredibly low interest rates, it will likely be necessary to have a down payment saved up. Also for those looking for their first mortgage, having a sizable down payment might be the only way a bank will offer a mortgage.

A Down Payment Translates to Instant Equity

Another big advantage of saving up money for a down payment is that you will guarantee that you have instant equity in your home. Equity is the difference of how much is owed on the home and the homes current value. By putting money down, you are ensuring that you already have 10% or 20% of equity in the home, which means you could sell it the next day, without loosing a significant amount of money.

It is also possible to borrow against your equity by taking out a home equity loan or a home equity credit line, although these can be a little risky, so it is important to understand how these types of debt obligations work.

Lower Monthy Payments

Having money for a down payment will also reduce your monthly mortgage payment. Even just putting $10,000 down can significantly lower your monthly payment, which leaves more money for the inevitable home repairs and day to day expenses.

More Security in This Roller Coaster Market

In todays turbulent housing market, most lenders are no longer offering no money down mortgages, instead requiring 10, 20, or 30 percent down payments on the home. While this might make it more difficult for some to purchase a home, in the end, having a down payment will actually benefit the homeowner a great deal.

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