First-time home buyers often save money for years to collect enough for a down payment on their house. Once they have that 5 or 10 percent of the house value in the bank, they settle follow through by agreeing to 15 to 30 years of monthly payments on the mortgage, one that costs a fortune in interest.
What many don’t realize is that increasing a down payment for a $300,000 home by just 5 percent can reduce the mortgage by as much as $30,000. Putting money from an annuity sale toward a down payment offers significant long-term savings on your home – decreasing the amount paid for interest, loan principal and monthly payments.
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AFFORDING A DOWN PAYMENT FOR YOUR DREAM HOUSE
For most people, the greatest obstacle for getting a new home is the down payment. While mortgage payments might be easily figured in to a budget, putting together enough cash to buy takes time and hard work. Buyers generally pay a minimum of 3.5 percent (for federal housing loans) to 20 percent for down payments. For a $200,000 home, this means coming up with at least $40,000 to bring to closing. As people still recover from the recession, saving $40,000 while still keeping up with regular bills and living expenses seems like an impossible feat.
Unfortunately, paying less than 20 percent has other financial consequences. Lenders can (and almost always do) require you to purchase private mortgage insurance, which increases your monthly expenses and the total you are paying for your home. Additionally, they may restrict you to mortgages with high interest rates or even deny your application.
HOW MUCH ARE YOU ACTUALLY PAYING?
Let’s look at an example. You’ve found the home of your dreams for $300,000 and you’re ready to commit to a 30-year mortgage. If you can afford a down payment of $30,000 (which would be 10 percent of the cost), then you will need a mortgage of $270,000. What kind of terms can you expect from a lender? Banks look at a variety of factors to determine your loan eligibility and your credit-worthiness. They collect credit scores, employment history and the size of your down payment to determine your interest rate. According to The Washington Post, in 2014 the average interest rate was 3.99 percent for a fixed-rate loan. With a 10-percent down payment, an applicant with excellent credit would likely be able to qualify for this rate.
With the help of a mortgage calculator, you can find out how much this will cost. In this example, monthly payments are $1,287.47. Here is a price chart based on a 30-year mortgage for a $300,000 home:
30-year mortgage at an interest rate of 3.99%
| Mortgage (Down Payment) | Monthly Cost | Interest Paid |
|---|---|---|
| $285,000 ($15,000) | $1,299.37 | $182,909 |
Notice the total interest paid comes to nearly $200,000. For that amount you could buy another house!
THE DIFFERENCE ANNUITY CASH CAN MAKE
Using money from your annuity to bulk up your down payment can be a game-changer. The larger down payment reduces the necessary principal for the loan and decreases the home loan to value ratio. Because of this, a bank may qualify you for a lower interest rate. For these examples, we used an interest rate of 3.625 percent. This chart shows how every increase in the down payment significantly decreases the total interest paid.
30-year mortgage at an interest rate of 3.625%
| Mortgage (Down Payment) | Monthly Cost | Interest Paid |
|---|---|---|
| $285,000 ($15,000) | $1,299.37 | $182,909 |
| $270,000 ($30,000) | $1,231.34 | $173,282 |
| $255,000 ($45,000) | $1,162.93 | $163,655 |
| $240,000 ($60,000) | $1,094.52 | $154,028 |
Now, if you are an annuity owner and you pull out $15,000 from selling annuity payments, you can increase your down payment by 5 percent, making a down payment of 15 percent. This reduces the mortgage total and the total interest is now $163,655.10. If we compare the interest on both mortgages, the difference between the old and new mortgages is nearly $30,000 — $193,487.47 – $163,655.10 = $29,832.37. If you double your down payment to 20 percent, and kept the same interest rate, your savings will be closer to $40,000 — $193,487.47 – $154,028.32 = $39,459.15.
ELIMINATING THE WAITING PERIOD
Bottom line: If you own an annuity or structured settlement and want to own a home, don’t go through another decade of saving or sit around until the date your annuity payments are scheduled. And avoid the mistake of making a small down payment. By paying more up front, you reduce the home loan-to-value (LTV) ratio, which increases your eligibility for a mortgage and the likelihood of receiving approval for a better interest rate.
By selling annuity payments – using a resource that is already at your disposal – and putting the money toward your home, you can save tens of thousands in interest. Let your neighbor be the one with the 10-percent down payment, while you pay 20 percent and spend the next 30 years with $200 more in your pocket every month.