Common wisdom for home-buyers has been to front at least 20 percent as a down payment, but this practice may no longer be rewarded by the financial markets, reports The New York Times. Because of rules implemented by Fannie Mae and Freddie Mac in 2008, “for most people, it turns out, smaller down payments result in lower interest rates,” according to the Times. For example, The Times found that a buyer with a 720 credit score buying a $400,000 home would typically be able to obtain a 30-year fixed-rate mortgage of 4.875 percent if he were putting down $80,000. Perversely, he could have gotten the same rate by only putting down 5 percent as well. Why’s that? In the case of the 5 percent down payment he would have been required to pay mortgage insurance of around a hundred bucks a month. Even stranger, if he’d been even more conservative and opted to put down 25 percent, his interest rate would have shot up to 5.375 percent. Apparently, lenders like the idea of a borrower having a cushion in his checking account better than having a smaller loan principal. Strange days indeed.
A Down Payment Anomaly [NY Times]
Photo by Corey Thomas