How Much Do I Need for a Mortgage Loan Deposit?

For most buyers, coming up with the down payment is the largest obstacle to homeownership. Often, buyers believe that every mortgage loan applicant needs to make a down payment of at least 20%. However, this is no longer the case. In fact, most banks are willing to lend to buyers with less than a 20% down payment as long as they purchase private mortgage insurance to mitigate the lender�s risk. In what follows, we will discuss the importance of a down payment and provide tips on how large of a mortgage loan deposit buyers should make.

Why Down Payments Matter

Lenders require a mortgage loan deposit for several reasons. First, the down payment tells the lender that the buyer is committed to the purchase of the home and the repayment of the loan. Secondly, mortgage loan deposits help the lender recoup losses if the buyer defaults on the loan. Finally, down payments also serve the interests of the buyer by preventing negative equity and allowing the lender to offer lower-interest loans.

Is 20% Really Necessary?

A sizable down payment is almost always a good idea, but it�s not necessarily required. The majority of lenders have some flexibility when it comes to down payments, with some institutions offering home loans with down payments as low as 0%-3%. As long as you have the requisite credit and income to qualify for these loans, your lender will probably not have any compunction about reducing the down payment requirement. However, a 20% down payment can help you in a number of ways. For one, it will lower your interest rate and your monthly payment, allowing you to pay your home off faster with less interest expense. Second, a substantial mortgage loan deposit will help you avoid owing more on your home than it is worth, a situation referred to as negative equity. If you had to sell your home under these circumstances, the financial consequences would be dire.

The Pros & Cons of a Smaller Deposit

Perhaps you need to maximize your cash flow in the short term and would thus like to make a minimal mortgage loan deposit. If that is the case and you expect your income to increase in the future, you can make a smaller down payment and purchase more house than you otherwise could afford with a 20% down payment. However, try to make your down payment as close to 20% as possible, as it will minimize your long-term interest expenses. On the downside, making a mortgage loan deposit of less than 20% will mean that you have to purchase private mortgage insurance (PMI). This is an additional monthly expense that is added to your mortgage payment until you reach 20% equity. Similarly, smaller down payments are extremely risky when home values are depreciating because you will more than likely end up upside down, or with negative equity, in the loan.