If you're ready to move on from apartment living and get your first home, the biggest obstacle you may have is coming up for the cash for a big down payment. While there are ways to get a loan without having a large down payment, there are disadvantages of doing so. Here are 3 things you need to be aware of when you do not have the cash on hand.
You'll Not Have Equity For A While
When you start making payments towards your mortgage, the initial payments are mostly interest with very little going toward equity. This means that it will take quite a few years before you start building up a substantial amount of equity in your home. This may be a problem for a few reasons.
If you want to quickly sell your home in the near future, you might end up having to pay more money out of your pocket when you close on the house. Normally you'd have some equity built up that you'd get back during a sale to help pay for fees.
You will also have problems getting a home equity loan if you need one. This might be necessary if you have a big unexpected cost associated with home ownership and need to borrow against your equity to help pay for the repair. This includes roof replacement, foundation repair, or a septic tank failure.
You'll Need to Pay For PMI
PMI, or private mortgage insurance, is necessary when you put down less than 20% of the home's value for a down payment. This type of insurance is not optional, and it essentially protects your mortgage lender in case you are unable to pay your mortgage and foreclose on the home.
You'll end up needing to pay anywhere between .25%-2% of the balance on your loan every year. PMI takes money out of your pocket that you would otherwise be able to put toward your mortgage payment.
Thankfully, PMI can go away once you pay off 20% of your home, but the less money you put down, the longer you'll have to pay this insurance.
You'll Pay More In Interest
The bigger your loan amount, the higher the balance on your mortgage will be. It will result in more interest being paid over the loan's lifespan. You can always make additional payments towards the principal later when you have the cash, just make sure that there will not be an early payment fee when doing so.
For more information, contact Assurance Financial or a similar company.