Hello and welcome back to the blog here at Tonawanda Valley Federal Credit Union! We’ve talked a few times about mortgage loans and personal loans at large, so today we thought giving first-time homebuyers another helpful resource would be advantageous. Mortgages raise all sorts of questions, but the main one that you see time and again is - How much should I put forward as the down payment on my mortgage?
Here at TVFCU, we aren’t just a banking service. We’re a proud member of the community, offering our members the best rates around for all sorts of loans and interest payments. Our members are our owners and our personalized service is something a big-box national bank can’t give you.
Loan-to-Value Ratio
Your down payment plays a key role in home buying. It’s the percentage of your home’s purchase price that you pay up front when closing on the home loan. Typically, lenders will look at your down payment as how invested in the home you are, affecting how much you need to borrow, as well as other factors. These can include:
- Whether or not your lender will require private mortgage insurance (PMI). If your down payment is under 20%, most lenders will require this
- Your interest rate. When you put down more money in a down payment, you will often be offered a lower interest rate, since you paid more up front.
That brings us to the core of the topic today: How much should you put toward your down payment? It’s highly dependent on the purchase price and loan specifics and typically falls between 5% and 20%.
Your down payment also plays a role in figuring out your loan-to-value ratio (LTV). To figure out your LTV ratio, the loan amount is divided by the fair market value from a property appraisal (or purchase price, whichever is less). The more you pay in your down payment, the lower your LTV will be.
Alongside your debt-to-income ratio and credit score, your loan-to-value is one of the main factors in determining if a provider extends credit to you. You want a lower LTV; if you have a lower LTV, you present less risk to lenders. This is because you have a higher stake in the property relative to the outstanding balance.
Let’s break that down a bit:
- A home is valued or sold at $250,000
- You have a 20% down payment ready of $50,000, so your loan would need to be $200,000
- The loan-to-value equation would be: 200,000 / 250,000 = .80
- Multiply the .8 by 100% to get an LTV of 80%
Private Mortgage Insurance
If your down payment is less than 20%, then your lender may require private mortgage insurance (PMI), keep in mind that this will increase your monthly payments. When considering how much to put towards your home down payment, this is an important factor to consider. Is it worth it to you to pay the PMI, or does it make more sense in your situation to make a larger down payment? Knowing the financial impact helps you make your decision with confidence.
Get in Touch!
Acquiring a mortgage loan for your Batavia, NY home can be complex and daunting. Take the guesswork out and get your mortgage through TVFCU! We have the best rates around. Don’t forget to check back with the blog for more, we’re always happy to help. You can give us a call at 585-343-5627 or 800-722-8224, or by reaching out via our contact form.
