Down payment: Deciding how much to put down on a house
When you buy a home, a percentage of the full purchase price will be paid at the time of closing or settlement. This large chunk of money is called a down payment.
There are a few reasons why you make a down payment:
• It’s security for your lender — Shows you have a vested interest in making sure the loan gets paid off and are less likely to default.
• It makes loan qualification easier — The bigger down payment on a house you are able to make, the easier it is for you to get approved for a loan.
• It starts building equity — The larger the down payment you make, the larger percentage of your home you actually own. Thus, less interest you will have to pay.
A typical down payment on a house ranges from 3.5% to 20% of the full purchase price, although some deals are all-cash, in which case the buyer doesn’t need to take out a mortgage.
While there is no set amount that you are required to put down when you buy a home, Tom, a homebuyer, advises: “You want your down payment to be as high as you can, as much as you can afford to spend, but you don’t want to run a risk of if you have an emergency fund, you don’t want to put your emergency fund into your down payment. And then if you need extra money for little things that come up once you’re the owner of the house and you didn’t know that the plumbing needed to be replaced, or you didn’t know that you have to buy a new front door or whatever it is; you don’t want all of your down payment money to be gone.”
If you are unable to make a large down payment, there are loan programs that can be tailored to fit your needs. However, keep in mind that for mortgage down payments that are less than 20%, private mortgage insurance may be required. Ask your mortgage banker about mortgage products that might be right for you.
JONATHAN: First-time home buyers, when they think of down payment, they think that that’s the only dollar amount that they’re going to have to bring to the table, and that’s definitely not the case. So in addition to down payment, there’s going to be a fee that the lender charges you, an origination charge.
JONATHAN: You’re also going to have to factor in title insurance, title fees, recording fees, and then typically you also pay your homeowner’s insurance a year in advance up front, so you’re going to have to kind of factor in your down payment plus X amount of dollars for other costs at kind of the end of the road.
SABRA: You’re buying a house, you’re looking at buying a house, and you’re trying to think of whether you can afford it. So I would just section up your money, like have one bucket for the down payment.
TOM: You want that to be as high as you can, as much as you can afford to spend, but you don’t want to run a risk of if you have an emergency fund, you don’t want to put your emergency fund into your down payment. And then if you need extra money for little things that come up once you’re the owner of the house and you didn’t know that the plumbing needed replaced, or you didn’t know that you have to buy a new front door or whatever it is; you don’t want all your down payment money to be gone.