You would think that putting more money down when buying a home would entitle you to a lower interest rate. Not so according to an article in the New York Times.
Take, for instance, borrowers who want to buy a $400,000 home, and who have a credit score of 720, which is considered very good.
In late August, such borrowers who had $80,000 saved for a 20 percent down payment would have qualified for a 4.875 percent rate on a 30-year fixed-rate loan, according to Regina Mincey-Garlin, an owner of RCG Mortgage in Montclair, N.J.
But that was also the rate offered to borrowers putting down only 5 percent, and therefore required to have private mortgage insurance.
Oddly, those who put down 25 percent, or $100,000, were saddled with a higher interest rate, 5.375 percent, Ms. Mincey-Garlin said.
The underwriting rules from Fannie Mae and Freddie Mac consider borrowers in the 20 to 25 percent down payment category to be the riskiest, in part because they are not required to carry private mortgage insurance. At higher down payments, however, rates begin to fall.
Amy Bonitatibus, a spokeswoman for Fannie Mae, said that the policy wasn’t meant to encourage lower down payments, which some have seen as the main culprit in the home foreclosure crisis.
“It’s just a less risky loan from our point of view,” Ms. Bonitatibus said, because the lender’s exposure to foreclosure losses is largely eliminated by mortgage insurance.
While borrowers who take out mortgage insurance can indeed enjoy lower interest rates, their monthly payments will be larger than those who made the larger down payments, because the loan itself is bigger
A borrower who put down 25 percent for a $400,000 home would make a monthly mortgage payment of $1,680, while the borrower who put 15 percent down would pay $1,906 — or $1,799 in principal and interest, plus another $107 monthly in mortgage insurance. (The mortgage insurance is tax deductible, however, so depending on a borrower’s financial circumstances, the net mortgage liability would probably be less.)
Ms. Mincey-Garlin of RCG Mortgage says she still advises borrowers to make a down payment as large as they can, because the increased equity will help them in the long term.
Read the entire article in the New York Times
This article was posted for educational purposes.