One of the concerns that new home buyers have is about how much they need for a down payment. The truth is that many people don’t have as much as they think to make their homeownership dreams come true.
How much you need for a down payment depends on what you currently have saved and what you want to spend on a home. Most people believe that a down payment for a home should be 20 percent. This can leave some would-be homebuyers feeling discouraged, but the truth is that you don’t need a large down payment. While it’s in your best interest to pay more for your home upfront because you’ll need to borrow less and can get a better interest rate, you don’t always need 20 percent.
How much should a down payment be?
What percentage you need for a down payment will depend on your financial situation. For example, if you have a good income but little savings, it may be better to put a smaller amount as a down payment. This means that you will have a larger first-time mortgage and monthly payments, but with a strong income, you should be able to handle it. On the other hand, if you have a lot of savings but not a big income, putting more towards the down payment makes sense. It will reduce the amount of money you’ll have to pay each month on your mortgage.
One way to see the impact that a higher down payment can have on your mortgage is to use a mortgage calculator. With this type of tool, you can understand how first-time mortgages and home purchases work. It will help you make a better mortgage decision.
Benefits of Higher Down Payments
Although you don’t need to put 20 percent down, you still might want to place a higher down payment towards your home because of the benefits it will bring. These include:
If you want a bigger home, which will cost you more, having a larger down payment gives you the freedom to borrow more. This essentially gives you more money to work with when you decide on what home you want to buy.
Rate of return.
Another consideration is the rate of return on your home. The rate of return isn’t impacted by the down payment you make. Rather, it is driven by appreciation. So, if you put more money down upfront, you’ll lower the rate of return on your home.
Lower interest rates.
The more you put towards your down payment, the less risk you seem to a lender. This means that you’ll be offered better interest rates than someone who puts less upfront.
For homebuyers who put less than 20 percent down, they’ll be required to pay mortgage insurance. This is security for the lender and provides the reassurance they’ll get their money back.