How Big Does Your Down Payment Need to Be?

For most prospective homeowners, the down payment is the biggest roadblock between dreaming about buying and actually collecting the keys.

It’s no secret the down payment on a home is a substantial chunk of change. Coming up with that much cash is no small feat. But remember, Rome wasn’t built in a day. As you consider how big your down payment needs to be, consider these key components.

 

A Standard Down Payment is 20%

To secure a conventional loan without Private Mortgage Insurance (PMI), most lenders will require you to make a 20% down payment. For a $400,000 home that’s $80,000.

Standard down payments come with a lot of benefits, including:

  • A better chance of getting your loan approved as you’re considered a more trustworthy borrower.
  • Lower upfront fees
  • Lower interest rate
  • More equity built up in your home immediately
  • Lower monthly payment
  • No PMI

Of course, a standard down payment comes with one obvious drawback – its size.

 

A Piggyback Mortgage Allows You to Put Down Just 10%

Your down payment acts as a security deposit for your lender. In the event you default on your loan, your lender has a better chance of recouping losses the more equity you have in the home.

A piggyback down payment allows you to put down just 10% of the mortgage. Then, you would take out a second mortgage to cover the remaining 10%.

These halved down payment programs do mean less cash up front. However, they also require you to carry PMI until you’ve built up 20% of the equity in your home. This increases the cost of your monthly payment. Piggyback mortgages are also typically connected to higher interest rates, meaning you’ll pay more over the lifespan of the loan.

 

Mortgage Assistance Programs Feature as Little as 3% Down

The Federal Housing Administration (FHA) is a government agency. It was created to help first-time homebuyers qualify for a mortgage. The FHA does so by guaranteeing a portion of an FHA loan’s balance. This allows borrowers to secure a mortgage while putting as little as 3% down.

For many borrowers, this is the lowest down payment program available. While FHA loans provide the distinct advantage of paying less upfront, they also require monthly insurance premiums and typically higher interest rates. Additionally, there is a borrowing cap on FHA loans. The cap is determined by the area in which you live and could potentially price you out of the market.

 

Zero Down Payment Programs for Veterans

VA loans are available to qualifying active and retired service members. Backed by the Department of Veterans Affairs, these loans come with a wide variety of benefits, including zero down payment option.

 

How Big Should Your Down Payment Be?

There is no one-size-fits-all answer. How much you put down is ultimately determined by your current financial status and lifestyle. The best first step you can make is to know your options.

Contact me today, I look forward to talking with you.

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