Down Payments To Buy A Home: How Much To Save
Aug 16, 2021
Down Payments To Buy A Home: How Much To Save
Buying a house doesn't just happen overnight. It takes a lot of careful planning, a little luck, and a lot of paperwork.
Part of the planning process is saving up enough money for a down payment on your future home. But how much do you actually need to save?
There are a lot of different types of mortgages out there, and each one has a different down payment requirement.
Let's take a look at what you need to know about down payments on your house, and how much you should be saving to buy your future home.
TRIED AND TRUE
For years, the conventional wisdom was to save 20% of the price of your home for your down payment. That means, for a $100,000 home, you'd need to save $20,000.
In 2020, the median cost of a home in the United States hit record highs, soaring past $320,000. That can make saving 20% feel impossible. Don't worry, you're not alone in feeling that way!
The majority of recent first-time homebuyers aren't saving 20%. According to the Realtors Confidence Index Survey, 71% of noncash, first-time homebuyers put down less than 20% on homes purchased in June 2021. A near majority of all homebuyers - 49% - also put down less than a 20% down payment. In fact, the average down payment is around 10%.
While most homebuyers aren't saving up and paying a 20% down payment, that doesn't mean it's not the goal to shoot for. Paying 20% of a home's cost upfront has some real benefits.
THE BENEFITS OF A LARGE DOWN PAYMENT
It Lowers Your LTV: When you take out a home loan through a lender, they're going to assess your risk as a borrower. The more financially healthy you are, the less risky you are.
One way your risk is assessed is by your loan-to-value ratio (LTV). It's the ratio of the amount you're borrowing versus the value of your home. For example, if you'd put 20% down on a home valued and priced at $100,000, the amount you'd need to borrow would be $80,000. That would give you an LTV of 80%. The lower your LTV, the more likely it will be that the terms of the loan will be in your favor.
You Won't Need PMI: For most conventional loans, if you pay less than a 20% down payment, your lender will likely require you to pay private mortgage insurance (PMI). This is a protection for the lender in case you default on your loan and can range up to 1% of the entire loan annually. That sounds small, but it can add up to serious money.
On conventional loans, you can request to stop paying the PMI once your LTV drops below a certain threshold. In many cases, it will no longer be necessary once your LVT is around 78%.
Your Mortgage Will Be Smaller: It's obvious that if you pay more upfront then you'll have a smaller mortgage. But what it also means is that if market values increase while you're paying off your mortgage, you'll have more equity in your home. That could be the difference between refinancing your mortgage and deciding to sell your home in the future.
It Saves You Money In The Long-Term: Spending money to save money may sound counterintuitive, but it's a basic tenet in the world of finance. Paying a higher down payment means that you'll be paying less interest over the life of your loan, and that your monthly payments will be smaller.
HOW MUCH DO YOU NEED?
For a lot of first time homebuyers, a 20% down payment may feel incredibly out of reach. If you're willing to accept higher interest rates and more fees, a lower down payment may be in the cards.
Some loans, like Federal Housing Administration (FHA) loans, only require a small down payment - as little as 3.5% - and a lower credit score (around 580). That makes them much more attractive to first-time homebuyers.
Others, like loans from the USDA, require absolutely zero down payment. These loans are designed to encourage people to become homeowners in rural areas. They are aimed at low- to middle-income families and are backed the same way as Veterans Affairs home loans.
By paying a 20% down payment (or more!) you set yourself up for a lot of savings by lowering your LTV and removing the need for PMI from your lender. In general, it makes you less of a risk, and gives you more peace of mind when repaying your mortgage.
Ultimately, your down payment amount comes down to the type of loan that you're seeking, the amount you're willing to pay in fees and higher interest rates, and the amount of risk you're willing to accept. The best way to get the most accurate, up to date information is to consult with a mortgage officer about your specific options and financial situation.
ORIZON CAN HELP YOU FIND YOUR NEW HOME
Once you've got your down payment saved up, it's time to start searching for the perfect home.
Our knowledgeable team is ready to help you find a home in just the right spot in northern Indiana. Call us today at 260-248-8961 to connect with an Orizon Real Estate agent.