Unless you are paying cash for your new home, the amount of your down payment can be important to the success of your home-buying process and your financial future. There are several approaches to making a down payment, each of which can be discussed with your realtor and loan officer before you begin the home-buying process.
Less vs More
Making a Minimum Down Payment
The down payment you make on a home can range from as little as 3.5% (FHA loan) to 20% of the sales price or greater. A VA loan will actually allow veterans to purchase a home with zero money down. Of course 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. Generally, you should put down as much as you feel comfortable with and can afford. However, it’s better not to totally wipe out your savings account, but rather to keep some funds set aside for that rainy day.
The Benefits of a 20% or Greater Down Payment
Being able to put down 20% of the sales price is a huge accomplishment for most home-buyers and is sometimes hard to do, especially for those just starting out with purchasing 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 (PMI) every month, which can run anywhere from .5% to 1% of the purchase price each year.
Here are some of the advantages of making a down payment of 20% or higher:
- The size of your monthly mortgage payments is lower.
- You may qualify for a lower interest rate.
- Statistically you are less likely to default on your mortgage.
- You will not need to pay for Private Mortgage Insurance. A lender will require it if your loan-to-value ratio is greater than 80% of the home value or purchase price, whichever is less. The monthly amount of PMI is affected by several factors, among them the type of home you are purchasing as well as your credit score.
Your real estate agent and loan officer will be able to walk you through each step of the home-buying process as well as help you determine the amount of down payment that will work the best for your finances and your new home purchase. Please give me a call at 214-642-1375, I would be glad to help you.
