When getting ready to buy a house, the question of how much you should set aside for a down payment is bound to cross your mind. Here’s everything you need to know about down payments.
A down payment is money you pay upfront toward your mortgage. Typically, it’s thought of in terms of a percentage of the price. A down payment allows you to have some ownership or equity in the house before you begin paying your mortgage, while the rest of the price of the house is paid by the mortgage lender. Most mortgages require a down payment, but there are some government-backed loans that do not.
Some loan programs will have stricter requirements than others. If you don’t want to put down 20%, you have other options as detailed below. But if you can afford to make a larger down payment, you’re likely to enjoy some perks.
• You may be able to get a better rate
• You could pay less interest throughout the life of the loan
• You will start off with more equity
• You can enjoy a lower monthly payment
• You may be able to avoid paying PMI
• Sellers may prefer to work with you
Putting 20% down or more on a house improves your chances of being approved for a mortgage and getting a more favorable rate. Since putting more money down upfront lessens the risk for the lender, they’re more likely to offer a better rate. This can help you because it means you’ll be paying less interest. Plus, making a larger down payment means you’re borrowing less money from the lender which means you won’t pay as much interest.
If you’re able to put at least 20% down, you can avoid having to buy private mortgage insurance (PMI) which helps the lender in case you default on your loan and is typically required in cases of down payments under 20%. However, if you don’t put that much down to start with, you can always seek to get PMI cancelled once you’ve paid enough of your mortgage to achieve 20% equity.
• You will be taking on more financial risk
• You won’t have as much money to put toward other costs
• You might not be able to buy a house as soon
One major disadvantage of making a large down payment is having less money after the payment is made. Putting more money down to start with means you can’t get it back easily and you won’t have as much money available if other expenses pop up or if you need to repair or spend on maintenance.
Saving up for a down payment can certainly take longer than getting a mortgage with little to no down payment. If you’re in a hurry to become a homeowner, you might not want to spend the time saving up.
In order to get a mortgage that requires a low down payment or no down payment at all, you may want to consider government-backed loans. Conventional loans, while potentially allowing for down payments lower than 20% with PMI required, do not provide for no down payments. Government-backed loans are insured by the government which makes approving these loans less risky for lenders. In turn, this lower risk allows lenders to offer lower interest rates and more flexible down payment requirements.
FHA loans, backed by the government, require very small down payments. You may be able to get an FHA loan with a down payment requirement as little as 3.5%.
VA loans are insured by the U.S. Department of Veteran Affairs and are available to qualifying current and veteran military service members and eligible spouses. In many cases, VA loans require no down payment.
USDA Loans are guaranteed by the Department of Agriculture’s Rural Development Program and do not require a down payment. These types of loans exist for rural and suburban homebuyers located in specific areas and meeting certain qualifications.
Putting down less money may mean you can purchase a home sooner and you’ll have more money available for other costs or emergencies, while making a larger down payment can save you money in the long run. It’s important to analyze your personal situation when it comes to determining how much of a down payment you should make and what kind of loan you should seek. To get a better idea of what your payments will look like with different down payments, experiment with a mortgage calculator. This will help you see how different down payment amounts impact your monthly mortgage payment.
If you want help from a qualified and experienced individual, you can contact us and you will be connected to one of our helpful Loan Originators who can help you figure out what path works best for you.