The Three Percent Down Mortgage

negotableHow much are you planning to put down on your next home? If you say 20 percent, you could be living in the past. Since Fannie Mae and Freddie Mac introduced 3% down mortgages nearly two years ago, the product has gained in popularity.

The three-percent mortgage, also known as the Home Possible Advantage program, allows first-timers and other qualified homebuyers to get into a home much sooner and allows homeowners to take their remaining down payment monies to use for other purposes – savings, furnishings, student loan payments, etc.

Anytime the down payment is less than 20 percent, borrowers should realize that their monthly payments become more significant. You’re financing a larger amount, which raises your debt profile and your financial risk if you want to finance other things like vehicles or college.

Fannie and Freddie require borrowers to purchase private mortgage insurance (PMI). While that raises the monthly payment, it makes low down payment loans attainable, allowing more people to enjoy homeownership. Along with mortgage interest, PMI payments are tax deductible for long-form filers. Last, PMI can be discontinued when the loan is either five years old, or if rising home prices have allowed the borrower’s equity position to reach 20 percent.

Building equity, which is like a homeownership savings account, takes time. You can build equity by paying down your mortgage, by improving your home, and by allowing home appreciation to work in your favor. But you have to be invested to get this major benefit of home ownership.

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