If you want to purchase a property, you’ll need money for a down payment, but how much you should put down is another topic. This is determined by the price range in which you are searching, the sort of mortgage loan you are utilizing, and your monthly budget.
Here’s how to calculate your down payment correctly (and no, 20% isn’t necessary).
What mortgage lenders expect
Because each mortgage loan program has various down payment requirements, your first step should be to decide which form of loan you’ll use to purchase your home.
If you’re ready to begin the mortgage application process, you should also browse lenders to get the best interest rate for you.
Typically, your mortgage choices will include:
FHA loans need a 3.5% down payment if your credit score is 580 or above. A 10% down payment is required if your credit score is between 500 and 579. You’ll also have to pay an upfront mortgage insurance cost, which will be added to your monthly mortgage payment.
Conventional loans need a down payment of at least 3%. If your down payment is less than 20%, most mortgage lenders will additionally ask you to pay a monthly private mortgage insurance (PMI) charge.
USDA loans: These loans have no down payment at all. However, you must purchase your home in a selected rural region and meet certain income requirements.
VA loans: These mortgages, like USDA loans, have no down payment required. They are, however, only accessible to veterans, military personnel, and their spouses.
Not sure which loan is best for you? Today, use an online tool to figure out what makes the most financial sense for you.
Remember that understanding your lending program is just one half of the puzzle. You’ll also need a decent notion of what price range you’re looking in to correctly estimate your down payment. For example, if you’re shopping in the $350,000 area and want to utilize an FHA loan, you may multiply $350,000 by 0.035 (3.5%) to get the minimum down payment of $12,250.
Personal preferences
As seen above, no mortgage loans demand a 20% down payment. However, putting down less money comes at a cost.
Putting down less than 20% on a traditional loan, for example, would result in PMI expenses being added to your monthly mortgage payment. These normally range between $30 and $70 every $100,000 financed, according to Freddie Mac. That’s an additional $120 to $280 per month on a $400,000 loan.
When deciding what to put down, keep your monthly budget in mind. A lower down payment will result in a higher monthly mortgage payment and will cost you more in long-term interest.
Consider some instances. Assume you’re purchasing a $400,000 property with a 30-year standard mortgage at 5.5% interest. Here are the payment and interest charges for various down deposit amounts:
AMOUNT OF DEPOSIT
PAYMENT PER MONTH (PRINCIPAL & INTEREST)
COSTS OF LONG-TERM INTEREST
3% ($12,000)
$2,203
$405,087
5% ($20,000)
$2,157
$396,735
10% ($40,000)
$2,044
$375,854
20% ($80,000)
$1,816
$334,092
The benefits and drawbacks of a 20% down payment
Clearly, a hefty down payment is advantageous. It may cut your monthly payment, let you avoid mortgage insurance, and dramatically reduce your overall interest payments.
But coming up with $80,000 (as seen in the table above) is not simple. It may potentially deplete your funds. This would make things tough if you had an unexpected home repair or medical cost. If you lose your job or another source of income, you may find it difficult to pay your mortgage, placing you at danger of foreclosure.
If you’re unsure how much to put down on a property, consult a mortgage specialist or a financial adviser. They can crunch the figures and advise you on what is best for your budget.