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Your lower down payments now will cost you more in the future

How down payments affect your mortgage expenses

One of the most challenging parts of buying a home, especially for first-time buyers, is making the downpayment.

Between the escalating value of real estate in some areas of the country and the requirement of 10 percent to 20 percent down on some loans, it can be a burden for prospective buyers to save enough for an adequate down payment. Even for people who do have that sum of money saved, it’s difficult to part with such a large sum of cash.

But in most cases, there are both short-term and long-term benefits to paying as much down on a home as possible.

Three buyers, three downpayment amounts
This article will compare the hypothetical experiences of three sets of homebuyers. Each purchased a $180,000 home for 30 years at 5 percent interest.

Buyers, A put 20 percent down, equal to $36,000, on their home.

Buyers, B put 10 percent down, or $18,000.

Buyers C received a loan that was insured by the Federal Housing Administration, which means they were able to get a mortgage with only 3.5 percent down. Their down payment was $6,300.

The short-term costs
Buyers A began with a mortgage balance of $144,000. Their monthly principal and interest (P&I) payment was $773. And because they met the minimum 20 percent downpayment requirement, they paid $0 for private mortgage insurance (PMI). In the first year, Buyers A paid $2,125 in principal and $7,152 in interest.

Buyers B began with a mortgage balance of $162,000. Their monthly P&I payment was $870. Plus, because they paid less than 20 percent down, they were assessed a monthly PMI premium of $70, which was added to their mortgage payment. Therefore, they paid nearly $170 more per month than Buyers B. In the first year; Buyers B paid $2,390 in principal and $8,046 in interest.

Buyers C began with a mortgage balance of $173,700. Their monthly P&I payment was $932. They also had to pay PMI, which based on their downpayment added $75 a month to their house payment. Overall, they paid $234 more per month than Buyers A and about $67 more per month than Buyers B. In the first year of the loan; Buyers C paid $2,563 in principal and $8,627 in interest.

The long-term costs

When they planned to sell their home after ten years, Buyers A had paid almost $66,000 in interest. They had $117,000 left on their mortgage, which left them equity of $63,000, plus any appreciated value in the home, to pay settlement costs and as a down payment for their next house.

After ten years, Buyers B also planned to sell their home. During that time, they paid more than $74,000 in interest. They had almost $132,000 left on their mortgage, which left them equity of $42,000, plus any appreciated value in the home, to pay settlement costs and as a down payment for their next house.

Buyers C lived in their home for ten years before selling it. During that period, they paid almost $79,500 in interest. They had $141,300 left on their mortgage, which left them equity of $38,700 plus any appreciated value in the home at the time of sale.

The overall costs
Buyers A paid $36,000 down and $66,000 in interest and walked away from their mortgage with $63,000 in equity for a total net outlay of $39,000.

Buyers B paid $18,000 down and $74,000 in interest over ten years. They also had to pay PMI, which was an additional cost not incurred by Buyers A. Over ten years, their PMI cost a total of $8,400. They ended up with $42,000 in equity after ten years for a total net outlay of $58,400.

Buyers C paid $6,300 down, $79,500 in interest and $9,000 in PMI premiums. They sold after ten years with $38,700 in equity, for a total net outlay of $56,100.