Down Payment Matters

ANSWER:

Lenders generally want borrowers to make a down payment, and a bigger down payment is considered “better” because it is felt that a borrower who puts more money into a property has a big incentive to fully pay off the loan.

The alternative argument goes like this: A big down payment is less important than the credit standing of the borrower. The proof? The Veterans’ Affairs program requires no money down and has insured 20 million loans since it began. As the VA explains, “mortgages guaranteed by VA have had the lowest foreclosure rate for the last 17 quarters and the lowest delinquency rate for the last 14 quarters compared to all other types of home loans in the nation, including prime loans, according to a report by the Mortgage Bankers Association.”

The VA experience suggests that the key to reduced lender risk is careful underwriting. Solid down payments are great, but down payments are not enough.

QUESTION:

My lender has offered to refinance two loans on my home. I have 50 payments left on a loan with a $60,000 balance at 6 percent and a $30,000 second loan at 3.99 percent. The lender wants to combine them into a five-year loan at 2.99 percent. The term would be shorter but my monthly payments would increase by $300. Also, they have offered a 10-year loan at 3.29 percent and a 20-year mortgage at 3.99 percent. I’m 60 years of age. What option would you choose?

ANSWER:

Today you have enough income to make your payments, but what happens down the road?

In the usual case, income declines with retirement. If the monthly cash is now available, I’d go for the five-year deal to have a house that’s free-and-clear in a few years when less income may be available.