Saving money for a down payment is a long slog. You probably know that making a large down payment can make your loan simpler to get and less costly to have. You might not know that the size of your down payment has a direct effect on the cost of your mortgage insurance and when it can be canceled.
If you're like most of us, though, you've probably only got a finite amount of cash to work with. In addition to your down payment, you’ll also need cash to pay points, closing costs and for reserves.
HSH.com’s Down Payment Decisioner Calculator shows you how both a smaller and larger down payment impacts your overall cost. What if you could make a smaller down payment and still pay the same MI cost? What if your down payment was just a little more so that you could pay less for MI… and how much more does it need to be?
So should you put down less? Should you scrape or beg Mom or Dad for more? What's the benefit or drawback of either choice? It depends, of course, but one thing is clear: no matter how much money you put towards your down payment, making the best choice isn’t easy. HSH.com's Down Payment Decisioner Calculator can help you learn how to best allocate your precious funds.
Using the calculator: Using the yellow “Your Down” calculator in the center, select your credit score, select purchase or refinance, add in the home price, followed by your down payment. Choose the loan term and whether it's a fixed or adjustable rate, and the loan’s mortgage rate.
You can also select an anticipated amount of yearly home price appreciation. The higher the appreciation, the sooner your MI can go away.
|Click here to see an example and discussion||More about home price appreciation||HSH Guide: Everything you need to know about PMI|
A note about home appreciation: If property prices are rising, the increase in the value of your home will mean you can cancel your MI policy sooner, saving even more money. We suggest that you run a basic calculation first without appreciation, then play "what if?" with different amounts to see how soon you might no longer need MI and the effect on your costs.
Using an example of a 760 credit score, for a purchase-money mortgage, with a home price of $125,000 and an $8,000 down payment, and with a 30-year fixed-rate loan with a 4 percent interest rate and no appreciation expected, we find the following:
Your available down payment is 6.4 percent of the home price, so of course, you'll need MI. With a loan balance of $117,000 you will have a monthly principal and interest payment of $558.58. Your MI premium will cost you $56.55 per month, and will run for 98 months, when it will come to an automatic cancellation point (the loan will have reached a 78 percent loan-to-value level). At the time, your total MI bill will be $5,541.90; at the point of MI cancellation, you'll still owe $97,499.97 when the MI policy cancels.
If $8,000 is all you can scrape together, and you use it all for the down payment, you have no money to pay other costs... but take too much away from your down payment and you'll move into a higher-cost MI bucket, where your MI cost nearly doubles.
However, you can keep some of that cash available for other purposes without triggering an MI cost kicker. In this case, you can hold onto about $1,750; this would trim your down payment from 6.4 percent to an even 5 percent... but your MI cost would remain the same $56.55 per month.
What can you do with those funds? Well, in this case, with a $117,000 loan amount, that $1,750 would be enough to pay a point up front, possibly lowering the interest rate on the loan by as much as a quarter-percentage point. (How much value can that have? See HSH.com's FeePay BestWay calculator to find out!).
Of course, you may save the most money making a larger down payment, even if it means begging Mom, Dad or relatives for contributions to your cause. If you can accumulate another $4,500 to put down, you will lower your loan amount (and monthly P&I payment) and chop $16.23 per month off your MI cost. Better still, your MI policy will be eligible to be cancelled almost a year and a half sooner than if you hadn't added those funds. Also, the total cost of your MI over that time would fall by almost $2,300 (not to mention the savings you'll accumulate by no longer needing the policy at all).