How Much Money Do I Need To Buy A House For The First Time
As of October 2021, the median home price in the U.S. is around $404,700. Assuming a 20% down payment, you would need $80,940 for a down payment, plus several thousand more for closing costs and fees to your lender, realtor, lawyer, and title company. Still, no set amount is required and home prices vary state-to-state and city-to-city. It’s all dependent on what you’re looking for in terms of size and type of property, neighborhood, amenities, and any other details specific to your situation.
The Average Down Payment On A House
Even though a greater share of buyers are putting down 20%, most first-time home buyers don’t make that oft-quoted benchmark.
Because outliers can skew an average, the telling figure for what other home buyers put down is the median down payment, meaning half paid that much or above, and half paid that much or below.
For first-time home buyers who financed the purchase, the median down payment was 7%, according to a 2020 survey by the National Association of Realtors. The median down payment for repeat buyers who financed was 16%.
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Mortgage Point Heres Why They Matter
In the mortgage world, there are these things called points. In the simplest terms, a point is an upfront fee paid to lower your interest rate by a fixed amount .
For example, if you take out a $200,000 loan at 4.25% interest, you might be able to pay a $2,000 fee to reduce the rate to 4.125%.
Paying points makes sense if you: 1) have the cash to pay them AND you 2) plan to hold the loan for a long time.
If you dont hold the loan long enough, the upfront cost of paying points often outweighs interest savings over time. Youll want to consider points carefully. If youre fairly certain that you will stay in your home for a long time and that you will not pay off the mortgage or refinance early, points can save you a good deal of money.
If, however, you pay points and, just a few years later, move, refinance, or pay off your mortgage, youll likely fare worse than if you did not pay points and instead took out a loan with a higher rate.
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Does Every Loan Require You To Put Something Down
Not always. For example, the VA loan requires no down payment in most cases, but its only for veterans and spouses of veterans, active duty military, Reservists, and members of the National Guard.If youre looking to move to a more rural area and have a low-to-moderate income, theres the USDA loan. For most other loans on the other hand, some down payment is required. The FHA is a low down payment option, and its great for those who have not-so-perfect credit.VA, USDA, and FHA are government-insured loans, which means that the U.S. government refunds a portion of a mortgage back to the lender in case you default on your payments. This puts lenders at ease.
You Might Qualify For Special Programs
Dealers may offer special financing programs with low rates or other incentives. In some cases, these programs require you to make a larger down payment.
When dealers advertise special incentives, theyre required to disclose the terms, so read the fine print carefully and ask questions to make sure you understand the down payment requirements.
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Reasons For Not Putting 20% Down
While a 20% down payment may help save costs, there are plenty of reasons why it might not be possible. For some, waiting to save up 20% for a down payment may cost too much time. While youre saving for your down payment and paying rent, the price of your future home may go up. So putting less than 20% down might be worth it to get into your first home sooner and start building valuable equity.
If you have high-interest credit card debt or other debt, its wise to work to pay down your balances even if that means youll have less for a down payment. Also, private mortgage insurance is an extra monthly cost, but its not a bad idea to weigh the pros and cons of PMI to become a homeowner.
Our down payment calculator can help you understand the costs and benefits of different down payment amounts so you can decide what makes the most sense for you.
The down payment amount thats right for one person, wont necessarily be right for another. Its important to consider the benefits of different down payment amounts and get advice from loved ones, your real estate agent and a mortgage loan officer to determine whats right for you.
Determining Your Down Payment
How much do you need for a down payment, then? Use an affordability calculator to figure out how much you should save before purchasing a home. You can estimate the price of a home by putting in your monthly income, expenses and mortgage interest rate. You can adjust the loan terms to see additional price, loan and down payment estimates.
Here are some steps you can take before determining how much home you can afford and how much you can put down on a house:
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Good Neighbor Next Door
The Good Neighbor Next Door program from the U.S. Department of Housing and Urban Development is available to law enforcement officers, teachers, firefighters and emergency medical technicians buying homes in certain communities designated as revitalization areas.
The program offers eligible borrowers 50% off the list price of the home if the borrower commits to using a property in one of these communities as their primary residence for three years. Eligible buyers can purchase a home with as little as $100 down if they take out an FHA loan.
Why Mortgage Lenders Require A Down Payment
For mortgage lenders whether its a bank, credit union or other type of lender a down payment helps offset their risk because it means the borrower immediately has some skin in the game and an investment to protect.
The more money you put down, the less the lender stands to lose if you default on payments and the lender has to foreclose, especially early in the loan term. This is why borrowers who put less than 20 percent down usually have to get PMI, as it protects the lender by repaying the unpaid portion of the loan if the borrower defaults.
Down payments on government-backed loans tend to be lower because the loan is at least partially guaranteed by a federal agency. If the borrower defaults, the lender can recoup some or all of the remaining loan amount from the FHA, VA or USDA, depending on the loan program.
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How Does The Down Payment Affect The Interest Rate On A Mortgage Or Does It
By Brandon Cornett | March 27, 2014 | © HBI,
Reader question: My husband and I are planning to purchase our first house soon. Right now we are weighing the pros and cons of putting more money down versus getting a lower interest rate. I told him that the down payment does not really affect the mortgage rate thats assigned to the loan. But he swears you can buy down the rate by coming into the deal with more cash in hand. Does the size of the down payment have any affect on the rate we get?
When your husband refers to buying down the interest rate, he might be thinking of discount points. This where you pay more money at closing in order to secure a lower rate on the mortgage. With this strategy, you are increasing your upfront costs to potentially pay a lot less over the long term. But thats another subject entirely, and you can learn about it here.
So lets move on to the question at hand: How does the down payment affect the interest assigned by the lender?
Mortgage Down Payment Options
From a low down payment mortgage to using your Registered Retirement Savings Plan as a source of funds, buying a home has never been easier.
The down payment is that portion of the purchase price you furnish yourself. The balance is obtained from a financial institution in the form of a mortgage. The amount of the down payment should be determined well before you start house hunting.
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Recap: 9 Ways To Lower Your Monthly Mortgage Payment
To recap, here are 9 ways you can lower your monthly mortgage payment with or without a refinance:
The good news is that, with mortgage rates sticking near historic lows, many homeowners are still eligible to refinance.
I advise that you talk to a qualified mortgage planner or loan officer who can provide you with a mortgage plan that best meets your needs, Laffey recommends.
Keep in mind that lowering your interest rate even a fraction of a percent can generate surprisingly big monthly savings.
So even if youre not sure whether youd qualify, its worth talking to a lender about your options.
Should You Get A Mortgage With No Down Payment
A no down payment mortgage sounds like a great idea, especially if youre currently giving away a large chunk of your income to rent an apartment while trying to save so you can purchase your first home. But before youre seduced by the idea you need to decide whether or not this financing option is the best strategy for you at this point in your life. There are a few conditions that should be met before you should consider a no down payment home loan:
- A stable income
- Being able to afford both a monthly mortgage payment and other life expenses
- Being able to financially handle a decrease or loss of income
If all of these conditions describe your current financial situation then a no down payment mortgage is, in fact, a good idea and you could potentially seriously benefit from it, just remember that while you might think you can handle it a lender still needs to decide whether or not they agree.
Unfortunately, if none of the above conditions describes you and your current financial situation then a no down payment mortgage is definitely not a good idea for you right now, we suggest you continue to save while rethinking your current spending and saving strategies.
Find out if you should buy or rent?
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Does Your Down Payment Affect Your Monthly Mortgage Payments
Just as it typically results in a lower interest rate, a larger down payment usually means smaller monthly payments. Since the balance of your loan is less, your monthly payments are smaller.
Lets say you want to purchase a $300,000 home with a down payment of 10% on a 30-year mortgage. The balance of your loan would be $270,000, with payments divided between 360 months. Without considering interest, taxes or insurance, your monthly payment in this example would be about $750.
Now, lets say that you put down 20% instead. This would lower the principal amount on your loan to $240,000. On a 30-year mortgage, your monthly payment would be about $667 .
Though youd pay more upfront, the principal portion of your monthly payments would be about $83 less. That might not seem like much, but its also not the full picture. A 20% down payment could save you hundreds of dollars a month on mortgage insurance, and it could also mean a better interest rate.
For a closer look at how your monthly payment can be affected by the size of your down payment, try a mortgage calculator. You’ll enter some basic info to get an estimated monthly payment, and you can adjust down payment amounts to see what works best for you.
How Much Should You Put Down On A House
Should you put 20% down on a house, even though its not required? In many cases, the answer is no. In fact, most people put only 612% down. But the right amount depends on your situation.
For instance: If you have a lot of money saved up in the bank, but relatively low income, making the biggest down payment possible can be smart. Thats because a large down payment shrinks your loan amount and reduces your monthly mortgage payment.
Or maybe your situation is reversed.
Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a , while planning to at some point in the future.
At the end of the day, the right downpayment depends on your finances and the home you plan to buy.
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Determine What Your Ideal Down Payment Amount Should Be
A down payment is a portion of the cost of a home that you pay up front. It demonstrates your commitment to investing in your new home. Generally, the more you put down, the lower your interest rate and monthly payment. There are also low or no-down payment options available on certain types of mortgage products, to qualified home buyers. Use this down payment calculator to help you answer the question how much should my down payment be?.
Estimated monthly payment and APR example: A $225,000 loan amount with a 30-year term at an interest rate of 3.875% with a down-payment of 20% would result in an estimated monthly payment of $1,058.04 with an Annual Percentage Rate of 3.946%.1
Low Down Payment Loan Programs
The old standard used to be that homebuyers needed 20% down to buy a home. Times have changed. Many homebuyers, especially first-time buyers, simply dont have a 20% down payment saved. This is becoming increasingly the case as home prices soar in many U.S. housing markets. For example, the median existing-home price in October 2021 was $353,900, a 13.1% increase from $313,000 in October 2020, according to the latest data from the National Association of Realtors.
In fact, homebuyers who financed their home put down an average of 12% of the purchase price, according to NARs 2021 Home Buyers and Sellers Generational Trends Report. First-time buyers using financing typically put down just 7% of the purchase price, the survey found.
For those who cant afford a 20% down payment, several types of mortgages offer a low down payment option.
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Cons Of A Big Down Payment
Saving money is great, but making a big down payment does have its drawbacks, too. For example, a big down payment can:
- Delay your home purchase: Since a big down payment requires more money, it may take longer to save up, which could delay your home purchase.
- Drain other funds: You may be tempted to pull from other places, like an emergency fund, to make the payment but you could be shorting your other accounts. This can be a problem when you need to access those accounts for an emergency or home repair. Tying your available cash up in your home puts you at risk of going into debt if something unexpected happens.
- Only provide some benefit: The money-saving benefits of a big down payment dont happen right away. Theyre more long-term, so if you dont stay in the home for a long time, you may not even experience the full benefit of a big down payment.
Minimum Down Payment On A House
The required minimum down payment for a house depends on the type of loan and a lenders criteria. Here are the minimum down payment requirements for the most common types of loans.
Conventional loans, which arent guaranteed by the federal government, can have down payments as low as 3% for qualified buyers. Some lenders offer down payment assistance grants to allow even lower down payments.
FHA loans, backed by the Federal Housing Administration, require a minimum 3.5% down. FHA loans allow lower minimum credit scores than conventional loans.
VA loans for military service members and veterans, and USDA loans for certain rural and suburban buyers, usually require no down payment. VA loans are backed by the U.S. Department of Veterans Affairs, and USDA loans are guaranteed by the U.S. Department of Agriculture.
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Do No Down Payment Mortgages Really Exist
Purchasing a home with no down payment saved doesnt mean that you dont have to make a down payment it simply means that youre not using your own hard-earned and saved cash to pay for the down payment. It means youre going to borrow your down payment , which in return means youre taking on even more debt. This is why its important that youre in good financial standing before you take on even more debt than is technically necessary.
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How Much House Can You Afford
When you are pre-approved for a mortgage, a lender will tell you the maximum loan amount for which you qualify, based on responses in your application. Your mortgage application asks about your estimated down payment amount, income, employment, debts, and assets. A lender also pulls your credit report and credit score. All of these factors influence a lenders decision about whether to lend you money for a home purchase, how much money, and under what terms and conditions.
As a general guideline, many prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. For example, if you earn $100,000 per year, you can afford a house between $200,000 and $250,000.
Rather than simply borrowing the maximum loan amount a lender approves, youre better served by evaluating your estimated monthly mortgage payment. Say you get approved for a $300,000 loan. If your monthly mortgage payment and other monthly debts exceed 43% of your gross monthly income you might have trouble repaying your loan if times get tight. In other words, be cautious about buying more house than you can reasonably afford.
Beyond buying a house, you may also want to contribute to other financial goals such as saving for retirement, starting a family, shoring up an emergency savings fund, and paying down debt. Taking on a too-high monthly mortgage payment will eat up cash that could otherwise go toward some of these important goals.
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