How Much Should I Put Down on a HouseAugust 23, 2019
First-time homebuyers are faced with many questions as they navigate the home buying process—one of the biggest being, “How much should I put down on a house?” Knowing what you should put down as a payment on your new home can help you craft your savings plan and better prepare for your big purchase. Explore Perry Homes’ tips for deciding how much your down payment should be.
What Is a Down Payment?
Your down payment on a home serves as a deposit sealing your deal to purchase the property. The remaining balance of the purchase is then paid off over time, most often by a monthly mortgage payment.
Down payments are generally expressed in terms of percentages. Say the house you purchase has a price tag of $250,000 and you provide a down payment of $25,000—that is a down payment of 10%. The remaining 90% of the home cost is what your monthly mortgage payment will cover. Consequently, a higher down payment will result in lower monthly mortgage payments. Higher down payments can also result in lower interest rates on a loan, reducing the overall cost of purchasing your home.
How Much Do You Put Down on a House?
Many potential homeowners have heard of the 20% rule when it comes to planning your down payment. However, this percentage is more of an ideal target than a hard and fast standard. The amount of money you should consider putting down on a home can be influenced by a variety of factors including:
- Financial stability (including savings, debt-to-income ratio, and earnings)
- Credit health
- Market conditions
Be sure to factor closing costs, which often amount to around 3-4% of the cost of your new home, into your down payment. For example, say you have saved $25,000 for your down payment on a home but must pay $7,500 in closing costs. Unless you have budgeted separately for such costs, that leaves you with only $17,500 to cover the down payment. Planning and budgeting accordingly can help you avoid being blindsided by additional payments and fees.
Homebuyers can choose to put as little as 3.5% down with a U.S. Federal Housing Administration (FHA) loan over a 30-year fixed-rate mortgage. Others opt to pay as little as 5% down with conventional bank loans, though not all banks offer this option and many cut off this opportunity at a certain loan amount. However, the most common down payment sits between 8-12%. Considering both your available funds for a down payment and how much you can comfortably afford as a monthly mortgage payment can help you arrive at the best amount for your unique situation.
There are also a variety of online calculators available to help you decide what kind of down payment you can afford.
The best course of action for hopeful homebuyers is to start saving as soon as possible to afford enough time to build up a healthy fund for the down payment—without pulling resources from other important areas of your financial health. Creating a monthly savings plan can help you stay on track and reach your goal.
Benefits to the 20% Rule
While the 20% rule is not a hard standard, it does pose some benefits to homebuyers. First, putting 20% down on a home can increase your chances of securing a lower interest rate on your loan. Lenders see individuals who pay a higher amount on a down payment as a good risk—you will not only be more likely to secure a loan, but also a better loan option.
Additionally, as mentioned before, the higher the amount of your down payment, the lower your monthly payments will be. This is beneficial in more ways than just reducing monthly expenses as you enter homeownership—paying off more of your home initially will result in fewer additional costs incurred over your mortgage term from interest rates. Conventional loans based on a down payment of less than 20% also typically require private mortgage insurance (PMI), adding to your list of costs.
Increasing your down payment on a home does not only have financial benefits, though. It is not uncommon for sellers to gravitate toward offers with higher down payments. This is because a higher down payment increases the buyer’s chances of securing a loan to purchase the property, therefore increasing the probability of successfully closing the sale.
Drawbacks to the 20% Rule
Saving 20% of the cost of your new home can be difficult, especially for first-time homebuyers. To reach this threshold, some potential buyers will delay their home search or purchase. This can become an issue if the area in which you are looking to buy is experiencing appreciating home prices.
Some potential homebuyers attempt to expedite the process by dipping into savings accounts or pulling money from other investments. While this may be a quicker way to collect your 20%, most financial advisors warn against the practice as it depletes necessary protections and funds. Emergency funds are also a very important part of homeownership. Some buyers will funnel all excess money toward saving for a down payment, neglecting to build up an emergency fund to protect their investment once they have purchased a home.
Larger down payments also tie up more of your money in a home. If you are not planning on staying in that property for very long, many of the long-term benefits of a 20% down payment may not outweigh the costs of saving up and spending the full amount. This can also become problematic if the housing prices in your area begin to drop. Conversely, if home values in your area are appreciating, a lower down payment could potentially yield a higher ROI on your property down the road should you choose to sell.
The answer to, “How much should I put down on a house?” will vary greatly based on each potential homeowner’s situation, needs and wants. Have you decided on your amount? Explore available Perry Homes properties within your price point to find the perfect home for you and your family.