You’ve found your dream house and are thinking about financing options. One of the first questions to answer is what your down payment, or the upfront cash amount you put toward paying for your house, will be. It may suggest that you should put down 20%, but depending on your circumstances or the type of loan you get, that may or may not be appropriate.
The purpose of a down payment
A down payment helps to demonstrates your commitment and financial creditworthiness when it comes time to buy a house. In addition, most mortgage lenders require that the home buyer put an amount of their own funds toward the purchase of a house. For prospective lenders, the greater the percentage a buyer puts down, generally the lower the likelihood of defaulting on a mortgage loan. For the buyer, a larger down payment can have benefits:
- Lower borrowing amount
- Lower monthly payments
- Potentially lower interest rates from lender
- Less interest paid in total over the term of the mortgage
Most mortgage lenders require private mortgage insurance (PMI) if your down payment is less than 20%. This insurance protects the lender in the event you are unable to meet your mortgage obligation. It’s typically a monthly fee that is included as part of your mortgage payment, usually 1% of the loan amount. Different types of loans have different down payment parameters. Two of the most common types of mortgages are:
Fixed Rate Mortgages: Fixed rate mortgages, as the name indicates, offer a fixed interest rate set at the start of the mortgage, meaning you pay the same monthly payment amount for the term of the mortgage, which is usually set for 10, 15, 20, or 30 years. The required down payment can be significantly below 20% with PMI on the remaining amount.
Adjustable-Rate Mortgage (ARM): With an ARM, the rate adjusts up and down depending on market rates. The initial rate of an ARM is often lower than the rate offered by a fixed rate mortgage, and rates usually adjust annually. The adjustment period can range from monthly to approximately every five years.
How Much Should You Spend On A House and How Much Should You Put Down?
To figure out how much you can afford to spend on a new home and how much your down payment should be, start by examining your personal needs and finances.
- You should think about what you need in terms of a house, including size, location, and features.
- Your financial advisor can help you develop a budget and determine how much you should spend, based on your current projected income and expenses.
- Once you have determined how much you can spend on a house and the down payment you can make, your mortgage lender can discuss different types of loans, rates, and payments to help find the right option for you.
Also, if you’re looking for something more hands on, here is a website that has a helpful mortgage calculator.
Schedule an Appointment with a Financial Advisor
Your financial advisor can work with you to help you develop a plan for a home purchase and answer any questions may have. To start the process, reach out to an advisor at SageSpring Wealth Partners. We’re here to help answer your questions so that you and your loved ones can feel financially confident.
