A down payment refers to the proportion of the purchase price that a potential homebuyer needs to pay in advance when securing their mortgage loan. This usually affects the amount of money that the prospective homebuyer needs to borrow and the interest rate they will pay. On the other hand, the minimum down payment is the least cash requirement that the homebuyer must outsource when purchasing a house. Such a threshold is required by many mortgage financiers, and the exact amount varies depending on the lending firm. For instance, in the US, this minimum is set at 3.5% and 20% for Federal Housing Agency and conventional loans respectively.
According to conventional wisdom, a down payment is considered favorable if it ranges between three and ten percent. Whereas a 10% down payment reduces the payable interest rate and monthly installments, the 3% option allows the homebuyer to choose either an adjustable or fixed-rate mortgage plan. The loan-to-value ratio (LTV), shows the amount a homebuyer owes the mortgage firm after the down payment. Expressed as a percentage, this ratio indicates the proportion of a home’s unpaid principal against its par value. Generally, a higher down payment implies a lower loan amount thus reducing the LTV. In case the homebuyer makes a down payment that is less than 20% of the home’s purchase price using the conventional loan plan, they are obliged to pay for mortgage insurance commonly referred to as PMI.
From my standpoint as a first-time homebuyer, a down payment below five per cent would be convenient, thus facilitating my early entry into the housing market. The need for waiting, saving, and continuously paying rent to the landlord, is offset by my good credit score and lower down payment. Although the PMI expenses have to be met, I would comfortably afford a fixed-rate mortgage amidst the rising real estate prices.