How Much of a Down Payment You Need?
When saving to buy a home, it is absolutely crucial that you take into account the amount of money that will have to put down as your down payment. What is a down payment? A down payment is the chunk of your own money that you are able to combine with the money you take out on loan. The money you provide for your own is known as a “down payment.”
Home buyers are typically expected to have a down payment between 3 and 20% of the sale price when buying a home. Although loans are available at 0%, these loans tend to cost an astronomical amount of interest. Additionally, because of the subprime lending crisis, fewer lenders are willing to lend to homebuyers who have no down payment.
The majority of lenders today require down payments. And the bigger the down payment you can provide, the better. Why is this?
-The larger your down payment, the less money that you have to borrow. While saving for your down payment can be difficult, but in the long run, it works out well as the less money you borrow the lower your monthly payments.
-If you only have a very small down payment, of about 3 or 5% you will likely be eligible for fewer types of mortgages and if approved will likely be charged a higher interest rate.
-The larger the down payment that you are able to provide the easier it will be to be approved for a loan, and be approved at a low-interest rate.
-For any down payment that is less than 20% of the asking price, will result in your being asked to pay Private Mortgage Insurance (PMI).
What Does Private Mortgage Insurance Mean?
Private mortgage insurance happens when the lender wants to make sure your home will have enough equity to pay off the loan balance should you default and go into foreclosure. However, since foreclosed upon homes are often sold at a greatly discounted price lenders want a buffer of at least 20%. Put bluntly, lenders want to be reasonably sure they can get the money they loaned you if the home has to be sold at a lower price than the original sale price.
Budgeting and saving for a down payment can also act as a reality check; if you have been making a strong effort and are still not able to save even a minimal down payment of 3-5%, you should ask yourself whether you are financially ready to buy a home, and handle all of the costs associated with it. Take some time to reflect on why you have not been able to save for a down payment, and think hard about whether you would be able to keep up with your mortgage payments, assuming you could find 100% financing.
While, it may be stressful to continue renting instead of buying, think of it this way: renting is less stressful than losing your home due to foreclosure because you were unable to pay the mortgage payments.