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How much should the down payment be for your dream house?

wooden house model balancing bag of money

Many people think that you need to pay at least a 20 percent down payment for your dream house. But that isn’t necessarily true.The average first-time homebuyer pays just 6 to 12 percent of their home’s total value. Some loan programs will even let you pay 3 percent or less, this is a home-buying tip that not many first time buyers are aware of.

Whether you make a large or small down payment will depend on your home-buying goals as well as your current savings.

Down payment

A down payment is money you have to pay upfront whenever you make a large purchase, like a house. It’s stated in terms of the price’s percentage. Many first time buyers either save up to be able to pay this down payment or are helped by family.

If you’re applying for a mortgage to buy a house, a down payment is paid towards your purchase. It’s a representation of your initial ownership stake in your house. Once you’ve made a down payment, a lender will advance the rest of the money so that you can purchase your home.

Many lenders require a down payment before you can make a mortgage. But some lenders will advance loans without a down payment. The Veterans Affairs and US Department of Agriculture, don’t require a down payment since they’re backed by the federal government. However, if lending from these institutions is not an option for you, there is still the option to pay a small down payment which will allow you to secure a loan needed to purchase a property.

How much down payment do you need?

According to most real estate homebuyer guides, a conventional mortgage will usually require a 3 to 5 percent down payment. This means that if the home costs $300,000, you should be prepared to pay $9,000 to $16,000 up front. If you want to avoid private mortgage insurance, which is an additional monthly cost, then you’ll need to pay at least 20 percent as a down payment. However, for many, paying 20 percent upfront is not a possibility.

Assess your current financial situation. Do you have a large amount of savings but not a lot of income? If so, then a large down payment might be a good option. However, if you have a healthy household income but little or no savings, then you might want to check out a low or no-down-payment loan. Do bear in mind that if you have no savings, you may not really be in a position to make a purchase such as buying a house, as expenses other than a loan to purchase the house invariably arise.

Use a mortgage calculator and set a budget

Illustration of a house as a piggy bank, with a woman using a calculator on the side (left)

If you need help calculating the correct down payment amount for you, use a mortgage calculator to determine how the down payment amount will affect the monthly mortgage amount.

Make a monthly budget that ensures you have enough money for regular expenses, home maintenance, and emergencies after you’ve made your down payment.

Don’t settle for the first mortgage program that you see. Compare different mortgage rates and programs so that you’ll be able to get the best deal. Don’t forget to check the fees that are part of each program.

Benefits of a large down payment

If you can afford a large down payment, then you’ll have a better mortgage interest rate, possibly less time to complete payments, more home equity, and a lower monthly mortgage payment. You’ll also be able to afford a better house.

If your down payment is smaller, then most lenders will see you as a bigger risk. However, you shouldn’t empty your savings account just to make a large down payment. It’s always wise to have something in the bank to fall on if you require it.

Drawbacks of a large down payment

Once you’ve made a large down payment, you won’t be able to get your money back unless you sell your house. You could borrow a loan against your house, but this would mean paying on 2 loans if you haven’t completed payment on the first. Many investors prefer to have liquid assets like money compared to an illiquid asset like home equity (the monetary difference between what your home is worth and how much you owe your lender).

If you’re a conservative investor, then you’ll want to make a smaller down payment that will still allow you to have substantial liquid assets.

Looking for other tips or first time home buyer guides for Williamsburg, VA? Put your trust in the company that has become an institution in the area, serving clients since 1885 –Coldwell Banker Traditions. You can leave us a message or call us at 757.229.9595. Alternatively send an email to info(at)cbtraditions(dotted)com.