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I have a new job, and my wife and I are considering buying a condo near my new work place due to the lack of adequate rental properties in the area.

Currently, we have a guaranteed $10,000 that we could put towards a down payment, and could probably scrounge up an additional $5,000 if needed.

For the type of condo we're looking for, which falls within the $200,000 price range, this is well below the usual suggested 20% down payment.

But, with my new salary, I would be able to pay more into my mortgage than what a 30-year fixed rate mortgage would require.

Is it possible, and wise, for me to 'catch up' on not having a significant down payment by making larger mortgage payments early?

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Absolutely! Paying more than necessary on the mortgage is a great way to reduce the total amount paid in the long run, regardless of the down payment amount.

Having a lower down payment brings forth three main issues:

  1. You may have more difficulty getting a mortgage in the first place.
  2. You have to pay mortgage insurance (PMI) until you get to 80% loan-to-value ratio (LTV).
  3. You have to pay more in interest (larger loan, more interest).

Paying more than necessary on the mortgage helps with 2 and 3, but not 1. Number 1 might not be an issue if you can still get the minimum down payment (3-5% from what I've seen) and your income is still enough.Assuming you can still get approved, paying more on the mortgage will save you a lot of money.

Plugging your numbers into this calculator (although any will do), gives a regular mortgage payment of:

  • $830 in principal and interest
  • $208 in property taxes (assuming 1.25% per year)
  • $208 in home insurance (assuming 1.25% per year)
  • $135 in PMI (assuming 0.875% per year)
  • $1382 per month total

Assuming $200k property cost, $15,000 down payment (so closing costs are paid from other money), and 30 year loan at 3.5%.

With this you pay PMI for about 6 1/2 years (total of $10,530) and total interest paid of $114,064.

If you pay $500 more per month you pay off PMI in 2 1/2 years (total of $4,050) and total interest paid of $52,596.

Big difference!

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  • Thank you - this is a really through and helpful compilation of info regarding a first-time mortgage and the types of expenses I would/would not avoid paying with a higher down payment (I hadn't even considered closing costs!). What this tells me is - I should probably put some more time into building up some home savings, not just for down payment, but for closing costs! I'll probably be accepting this answer, but I'll keep this open a bit longer in case any further advice can be offered. Again though - thank you, this was very informative! – Zibbobz Apr 30 at 16:10
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    @Zibbobz You're welcome! Closing costs can be up to 5% or more of the purchase price, so about $10,000 in your case. Not chump change... I agree, you might be in a much better position after a year of saving up. – Nosjack Apr 30 at 16:12
  • Ideally that's what I would like to do - rent out a modest 2-3 bedroom apartment in the area until we can save up at least $10,000, and combine it with a $10,000 CD my parents have set aside for us. The only problem being, rentals in that area are either 0-1 Bedroom (way too small for us) or very expensive 3+ bedroom - so I've been considering other options. – Zibbobz Apr 30 at 17:02
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    Just shop around a bit and see what a lender can get you and how much difference it actually makes, I've purchased multiple properties at 5% down and they were fantastic decisions because prices were increasing rapidly in the area at the time, just be aware of the costs and make sure you're comfortable. Waiting and building up more savings is the better call in most circumstances. I'd expect flat or declining housing prices over the next year (will vary wildly by region) but it could make waiting even more attractive, especially if you can find a tolerable cheap rental for now. – Hart CO Apr 30 at 17:18

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