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Smart Mortgage Strategy for Average Joe

by Natalie Aranda

Buying a home is probably the biggest financial decision most people will make in their lifetime. The percentage of down payment you put in will make a huge difference for the health of your personal finances for years to come. What percentage of down payment you should choose is largely dependent on the current mortgage rate.

20% Down Payment

It's common for a lender to require 20% down payment from homeowners for mortgage financing. The initial payment does look hefty, but the homeowners won't be required to purchase mortgage insurance at least. If the mortgage rate is high, large percentage of initial down payment will reduce the total cost of home ownership over a course of 15 or 30 years of your mortgage payment unless the rate is so high that you know for sure you will refinance or remortgage in a few years.

0% Down Payment or 100% Mortgages

When economy is slow and the mortgage rate is low, it is possible to obtain 100% mortgages that cover the full value of a property, without the requirement of a down payment. 100% mortgages are designed particularly for first time homeowners who do not have a deposit available. If the real estate market falls in coming years, you may end up owing more money than your house is worth. In a rising property market, the value of your property make quickly exceed the amount of mortgage you own.

Cash Back Mortgages

In a slow real estate market, some lenders are even pushing for A cash back mortgage for borrowers with good credit ratings and the backend of a reasonable personal wealth. Borrowers can borrow the amount of money that is more than the value of the property they'll purchase. This is even more common for mortgage refinance when the mortgage you own is only a small amount of the value of the property.

Some homeowners may put the extra cash injection into home improvement, while other actually put the cash in low-risk investment (such as S & P 500 index fund) and hope to make some money from the investment as the economy and stock market and recover.

It's easy and handy for anyone to compare the pros and cons of each option with a mortgage calculator. It's strongly recommended to consult a experienced personal financial planners especially if you are thinking of more risky 100% mortgages or cash back mortgages.