When you buy a home, it is necessary to provide a down payment of some kind in order to establish credibility with the bank. Lets learn more about how much a down payment can cost a new or existing homeowner…
When you buy a home, one of the biggest up-front expenses of the mortgage loan is the down payment. Not to be confused with closing costs, the down payment is the portion of the purchase price that you pay up front at closing. Generally, if you put less money down on a home at closing, you’ll pay more in fees and interest over the mortgage loan’s lifetime.
How much you’ll be able to afford to put down depends on a few factors, but in general, the bigger your down payment, the better. That’s because the less you have to finance with your mortgage, the cheaper that loan will be.
Types of Down Payments
The historic “golden rule” of down payments is to save 20%. A down payment of 20% will allow for the best rates and make you more appealing to lenders. But the challenge of saving that much can be overwhelming, especially to first-time home buyers. Thankfully, there are options allowing for a smaller down payment.
The Federal Housing Authority has a program that allows people buying their first home to get a mortgage with only 3.5% down. Fannie Mae and Freddie Mac, mortgage companies sponsored by the federal government, recently started offering 3% down payments. The downside to these 3.5% down payments is that you’ll likely have to pay private mortgage insurance every month until you reach 20% equity in your home. Annual PMI payments usually cost between 0.5% and 1% of the total loan amount. Paying PMI is like paying interest on your mortgage, but without the benefit of deducting it on your taxes. Unfortunately, the only way to avoid PMI is to put 20% down.
If you’re a veteran or current member of the military, you may be eligible for a mortgage with no down payment required. You can check out this year’s best mortgage lenders here, or contact the VA directly for more questions or Navy Federal Credit Union, a private lender that offers these mortgages to members who qualify.
The US Department of Agriculture also offers mortgages with no down payments for those willing to live in rural or semi-rural areas.
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Start Saving for a Down Payment
Once you’ve figured out how much you need for a down payment, it’s time to start saving. One of the most common and effective methods is to set up automatic transfers from your bank account or your paycheck to a dedicated savings account for your down payment. The earlier you start saving, the quicker you will be able to put a down payment on a home. Contribute to this savings account as often as you can. See more tips that every first time home buyer should consider.
Other ways to save money for a down payment include cutting your spending, paying off your debts, and even getting another job to supplement your primary income.
Buying your first house can be intimidating, but there are plenty of ways to break things up into manageable tasks. Once you’re on the right track to saving for a down payment, you’ll feel better prepared to tackle the next steps in the home buying process.