When you’re looking to buy a home, one of the most important key aspects of the buying process and going about acquiring a home loan, is your down payment. If you’re new to the housing market, you may be unsure of where to start and what your down payment should consist of.
What is a down payment?
A down payment is actually pretty simple in its idea. It is the money that you, the buyer, gives to the homeowner to lock down the home sale. That amount will be subtracted from the total cost of the home, and usually, you’ll get a loan, or mortgage, to cover the rest of the cost of the home.
The bigger the down payment, the lower the loan
So, the more you are able to put down as a down payment, the lower the amount you have to borrow from the bank or your mortgage office in order to afford the home. This often results in lower monthly mortgage payments, rather than a shorter loan period. Your interest rate is also determined based on how much your down payment is. The more you are able to pay down initially, the lower your interest rate on your mortgage will be. Even though it’s more money initially, it saves you money in the long run.
It doesn’t have to be 20%
If you were to ask any of your friends and family for their opinion on how much you should save up for your down payment, you’ll probably hear “20%” pretty frequently. But how much is that, really? If you were buying a home that only cost $200,000 and you were to pay a 20% down payment on it, you would be paying $40,000 out of pocket, upfront. Most homes are going to fall in a higher price range than that, though. If you can afford a 20% down payment, that is great! But if you can’t, that doesn’t mean that you can’t afford a house. Most potential homeowners pay down significantly less than 20% on their down payment. Depending on who you are getting a loan with, you can even do a 0% down on your loan, but your monthly payment and interest rate will both be higher than if you were able to afford a down payment. Even if that down payment is small, just a few thousand dollars will make a much bigger difference than you think!