If you plan to purchase a home in the future, it is a good idea to start saving up for a down payment. You can simply open a savings account and stash extra cash, so you are ready to pay the down payment when the time comes. But the magical question that is likely on your mind is how much money will you need for your down payment?
How do down payments work?
Before we discuss numbers, let’s first discuss the basics of the down payment. When you purchase a home, a down payment is cash you will pay upfront. The money goes towards the principal of the loan (note that the down payment is different from closing costs). The more money you put towards the down payment of the purchase of your new home, the less money you will have to borrow. Down payments are typically calculated as a percentage of the purchase price and can range from as little as 0% (depending on the loan solution) to 100% (all cash sales) although the most common is 20% for a property that is being used as a primary residence.
The 20% rule
One of the biggest myths about the down payment is you need to put at least 20% of the purchase price down. For many borrowers, this is unrealistic. The good news is that 20% down is no longer the industry standard. According to the National Association of Realtors, the average down payment on a home in 2021 was just 7%. Depending on the type of loan, you may be able to put even less than 7% down and some loans (such as VA loans and USDA loans) won’t require a down payment.
Interest rates and down payments
The size of your down payment will have an impact on the interest rate of your loan. The larger the down payment, the more likely you will be to receive a lower competitive interest rate. A lower interest rate will help you save money on your monthly mortgage payments.
Private mortgage insurance
Depending on the lender and the type of loan you receive for your home purchase, you may have to pay mortgage insurance if you make a smaller down payment upfront. This is common for conventional loans. If you are required to have private mortgage insurance, you can pay it all at once or have it rolled into your monthly mortgage payments.
Down payment assistance programs
Saving for a down payment can often be an obstacle for first-time homebuyers. Depending on your financial circumstances (including your credit score), you may qualify for down payment assistance through your state or municipality. Your Loan Originator can help you research these programs and help you apply.
Where to begin
Before considering how much money you will need for a down payment, the first step is figuring out how much you can realistically afford for a mortgage. You can use an online mortgage calculator to get a rough idea of what your monthly mortgage payments will be with different down payment values. Our Axia App has an interactive mortgage calculator for you to use once you download the app to your smartphone. You can also begin the process of getting pre-approved* to get a clearer picture of how much house you can afford before saving for a down payment.
*Pre-approval is not a commitment to lend.
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