There is an art to figuring out exactly how much of a down payment you should make on a house. But don’t let the basic concept of a down payment deter you from searching for your new home.
So, what is considered an appropriate down payment?
Well, typically putting down 20% of the cost of the home will help you to avoid paying private mortgage insurance. And typically 20% is viewed as a good “average” amount to put down on a house. There is a fair amount of people out there who will encourage you or even require you to make a 20% down payment (if not more)! But that does not mean 20% is absolutely what you have to pay. If you have the 20% saved? Put it down. It will bring the amount of money you need to borrow for your mortgage significantly less.
Just because you have it, though, does not mean you need to spend it. And, yes, this does apply to down payments, too. Paying for more than 25-30% for your down payment may not be the best investment for you. Even though you may have the “cash” on hand, it is important to take other costs into consideration before you do. Those other costs range from closing costs to realtor fees to general maintenance of your home.
While it may seem like a great idea at the time, making a large down payment may not be the the ideal move for you in the future. Other options, besides making a large down payment, can be taking out a mortgage with a shorter term- so 10 years rather than 30, for example. You will ultimately pay less in interest and will have more “cash” on hand in the meantime. If you have questions about what is the best move for you, talk to one of our experienced loan officers. They can take a look at your unique situation to find what is best for you.
The Under 20 Crowd
Now, just because you don’t fall into the 20% or “more” categories doesn’t mean you can’t actually afford to buy a home. In certain areas (and in certain situations) you have the ability to put down as little as 0%. The USDA and VA loans offer 0% down, MSHDA offers 1% down, and FHA offers 3.5% down. Each of these options definitely makes purchasing a home significantly less daunting and more approachable for many buyers, especially first time buyers.
Like we mentioned before, if you are putting down less than 20%, you will be required to pay private mortgage insurance (PMI). What is it? Essentially insurance for your lender, in the event you foreclose on your home. And, as the borrower, you pay the premiums. The average cost of PMI can range from $30-$100, depending on the amount you make for your down payment. While that may seem like a lot of money to pay on top of your monthly mortgage payment, it does allow for you to purchase a home without making a huge down payment. Just think about it- 20% of a $300,000 home is $60,000. An additional amount of money each month can be called a “small-er” price to pay to buy the house of your dreams.
Now what?
The most important thing we can recommend is talking to a loan officer. Every individual situation is so unique. Not everyone can easily fit into a predefined category. The best approach is to talk about the amount you can put down, the monthly payment you can afford, the other factors in your life- with someone that has experience in the mortgage industry.
Don’t just take our word for it- we have so many happy clients (and new homeowners) who are happily living in the house of their dreams.
Natasha Mason