Unless you are paying cash for your home outright, the amount of your down payment can figure heavily into the success of your home-buying process and your financial future. There are several strategies and approaches to making a down payment, each of which can be discussed with your realtor before you begin the home-buying process.
Less vs More
Making a Small Down Payment
The down payment you make on a home can range from as little as 3.5% (FHA loan) to as high as 20% of the sales price or greater. Naturally, putting down as little as possible will give you some breathing room for cash emergencies as well as additional funds to repair and improve your home. However, if you can afford putting 20% down on a house you escape the cost of private mortgage insurance (PMI) and avoid higher monthly mortgage payments.
The Benefits to a 20% or Greater Down Payment
Putting down 20% of the sales price is huge accomplishment for most home-buyers and is quite difficult, especially for those seeking to purchase their first home. A higher down payment will allow you to pay less interest over the life of the loan and avoid having to pay for private mortgage insurance, which can run anywhere from $45 to as high as $60 per $100,000 in purchase price.
Here are some of the advantages to making a down payment of at least 20% of the sales price of a home:
- Less likely to default on the mortgage.
- Reduces the size of your monthly mortgage payments.
- May qualify for lower interest rate.
- No need to acquire and pay for Private Mortgage Insurance. A lender will require PMI if your loan-to-value ratio is greater than 80% of the home value or purchase price, whichever is less. Your monthly PMIamount is affected by several factors, depending on the type of residence you are purchasing, your credit score, and several other determinants you can discuss with your realtor.
Your agent will be able to walk you through each step of the home-buying process and discuss the down payment amount you are comfortable making.