Depending on the home you buy and the type of mortgage you choose, down payments can easily cost up to tens of thousands of dollars. Here’s a look at how much you will likely need for a down payment when buying a home, and what impact it will have on your mortgage payments.
You’ve probably heard that putting 20% down on your new home is standard. For example, if you’re buying a $400,000 home, your out-of-pocket down payment would be $80,000.
While setting aside that much cash can be a serious roadblock for many homebuyers, it also comes with many important benefits. These include:
Less total interest charged — The more you put down toward your home purchase initially, the lower you will owe on your mortgage. This equates to less interest paid over the life of the loan.
Better interest rates — Mortgage lenders will generally offer lower interest rates to buyers with larger down payments, saving you even more in interest over the course of your mortgage repayment.
Lower credit score requirement — Credit scores play an important role in mortgage approval, and will also impact the interest rate you’re offered. If you have a lower score or negative credit reports, offering a higher down payment can help out in the homebuying process.
Lower monthly payments — As covered, the higher your down payment, the lower your mortgage debt. This translates to a lower monthly payment over the same loan term.
While it may be wise to contribute 20% to your down payment, it is no longer a golden standard to do so for all homebuyers. You can often get away with putting down significantly less on your new home, depending on your mortgage lender and the type of loan you choose. Here is a breakdown of down payments, based on mortgage type.
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When it comes to taking out a conventional mortgage — such as a 15- or 30-year fixed-rate loan, or even an adjustable-rate mortgage (ARM) — the individual lenders will determine your eligibility based on a specific set of underwriting guidelines.
Depending on your individual scenario (e.g. personal credit history, loan amount, loan-to-value ratio, etc.), you may be able to put down as little as 3% on your home purchase. For most borrowers, 5% to 15% is most likely. Borrowers with bad credit or those looking to buy secondary or investment properties may still need to put as much as 20% down.
It’s important to keep in mind that putting less than 20% down on your conventional home mortgage may trigger a private mortgage insurance (PMI) requirement from your lender. This insurance — which can cost between 0.5% to 2% of your loan amount each year— is designed to protect your mortgage lender if you default on your new home purchase. Once your home equity reaches the 20% threshold, you can request that your PMI be removed. (Once your loan balance is reduced to 78%, however, PMI is automatically canceled according to federal law.)
There are a few different government-backed mortgage options for borrowers to choose from, which may allow for lower down payment requirements even if you have less-than-perfect credit. Since government home loans may be backed or insured by federal programs, lenders are able and willing to offer more flexible requirements.
FHA loans are the most common government mortgage products. Down payment requirements may be as low as 3.5% for qualified buyers with a credit score of at least 580. However, If your credit score is between 500 and 579, expect your FHA minimum down payment requirement to be at least 10%.
Also, no matter the down payment amount, all FHA loans require a mortgage insurance premium (MIP), which is due up front and on a monthly basis.
Eligible borrowers may be able to purchase a home with no down payment if utilizing a VA or USDA mortgage. However, these mortgages are not offered to everyone.
VA loans are offered to active-duty military members, retired veterans, and eligible surviving spouses. These loans have no down payment requirement, feature competitive interest rates, and may offer lower fees at closing than traditional loans. However, it’s important to note that an upfront funding fee will play into your loan costs if you go the VA route.
USDA loans are offered to homebuyers who purchase eligible property in rural areas. You’ll also need to meet certain household income requirements to qualify.
So, how much should you really be saving for the down payment on your next home? The answer really comes down to... as much as you can afford.
If you qualify for a 0% down loan (such as a VA or USDA mortgage), you don’t need to worry about saving for a down payment. However, you may still want to contribute something toward your loan to build up equity faster or reduce your interest rate.
The more you put toward your home at purchase initially, the less you’ll need to borrow. This means more equity off the bat, access to better rates and terms, less interest charges overall, and the ability to get out of debt faster. And when it comes to conventional mortgages, you will also save yourself the cost of PMI if you put at least 20% down.
Saving tens of thousands of dollars (or more) for the down payment on a home can take years to accomplish. While a down payment may represent a huge financial undertaking for many families, it also helps in reducing overall mortgage costs. The right down payment may even give buyers access to better loan products, making the home of their dreams a greater reality.No matter what you provide in a down payment, Fiona can match you with mortgage offers catered to your specific needs. Try our free service today. GET OFFERS
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