Down Payments 101

Down Payments 101

Down Payments 101

One of the most profitable methods to create security for yourself and your family or create generational wealth is to invest in real estate. Over 60% of first-time buyers believe that buying a home or investment property always requires a large down payment. Saving money for a down payment can take years and be one of the biggest self-imposed hurdles to buying a home. Yes, the self-imposed hurdle is correct. You can buy a home with far less of a down payment than 20%.

What is a down payment?

In simple terms, the home down payment is the total amount of money you agree to put down to purchase a home. Combined with your mortgage loan, these two totals will equal the selling price of the real estate. Understanding your amount of monthly repayment amounts is critical also.

Our Mortgage Calculator is a fantastic tool to see how much you can afford monthly towards a mortgage payment based upon your down payment and annual income is our Mortgage Calculator. It will also consider home-related expenses such as:

  • Total Home Cost
  • Down Payment Amount
  • Interest Rate
  • Loan Terms in Years
  • HOA Fees (if required)
  • Insurance
  • Property Tax

How much is needed

Take heart if you have been saving for years and struggled to overcome the typical 20% down payment misconception. 

A 2018 report on consumer housing trends reported that more than 50% of buyers invest less than 20% when buying a new home. Most conventional 30-year fixed mortgage transactions see a down payment of between 3 and 20 percent of your home’s sale price.

Larger vs. Smaller Down Payments 

Knowing what amount to invest as a down payment based on your financial situation is the best way to determine if you continue to try and save or go after a home with less.

Besides minimizing a total amount borrowed, thus keeping interest costs lower, a larger down payment does have some pros, as listed below:

  • Lower Interest Rate: You could have a lower interest rate with decent credit. The larger amount of down payment lessens the risk of the lender. 
  • Private Mortgage Insurance: In most cases, any down payment below 20% requires an insurance payment to protect the lender. Learn more about PMI at this link and below.
  • Lower Monthly Payments: More money down on a home means less financing you require and will make your repayment amount less each month.
  • Future Equity: This is a strength only when you need it. Equity is what your home is worth after deducting how much you owe. If you put down more, the equity is higher. You gain equity every month you make your mortgage payment.
  • Collateral Asset: If an emergency or need for money comes up in the future, you can borrow money using the equity in your home as collateral.
  • Quicker Offer Acceptance and Sale: Sellers are more likely to accept an offer with a higher down payment, and lenders and more likely to approve a loan with a higher down payment.

A smaller down payment has advantages to consider also besides the most crucial factor of not having to save so much money upfront: 

  • Purchase Earlier: If now is a good time in your life with stable income(s) and affordable real estate in an area you wish to buy- less down = no more waiting.
  • Improvement Funding: Having cash in the bank and not tied up in a down payment allows you to make any improvements you want to your new home without waiting or borrowing.
  • Financial Savings: We all like to have a savings account, rainy day fund, or emergency fund, whatever you call it. Having cash on hand because of a lower down payment is a secure feeling.

What is PMI?

Private mortgage insurance (PMI) is required for conventional mortgage loan borrowers with less than a 20% down payment. PMI only applies to conventional loans. It’s insurance for your lender to protect them should you stop making payments. (Other types of loans may include other types of mortgage insurance.)

How Much Is PMI?

PMI rate may fluctuate; however, PMI typically costs 0.5 – 1% of the loan amount per year broken into monthly installments. The percentage is based on several factors to determine risk, including your credit score, down payment amount, and existing loans.

Can a Down Payment Ever Be Optional?

While getting something for nothing may seem like a dream come true. In real estate, it is a possibility. Zero-Down Payment options do exist and require meeting specific criteria such as Veteran Affairs (VA Loan) and Department of Agriculture (USDA Loan) programs.

In Summary

Today, more than ever, you could have the keys to a new home much more quickly. Home Buyer’s Guidance is dedicated to educating new home buyers to make the process of buying a home easier.

Our team is experienced in many facets of the Real Estate industry has been home buyers, investors, realtors, property managers, and more. Our sincere wish is that this site will benefit millions of individuals and families embarking on the journey of home ownership.

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