When it comes to the deposit – how much you should put down on a house, there are multiple factors to consider. The right down payment for you depends on your goals and financial situation. While there are plenty of pluses with a larger down payment, putting down too much could leave you strapped for cash after you move in.
Avoid using your entire savings for a down payment. The last thing you want to end up is, house poor – spending too much of your income servicing your mortgage. It’s also important to make sure you have enough cash on hand to cover closing costs, which are usually 2%-5% of the home’s purchase price. Leaving a cushion for ongoing home maintenance and repairs, as well as potential emergencies, is a good idea even if you’re purchasing a move-in-ready home. At the end of the day, you want to be sure your down payment leaves you with enough room to cover all of the costs of buying a home.
Benefits of a larger down payment
Saving enough money for a substantial down payment takes time, so a zero- or low-down-payment requirement may speed up your ability to buy a home. But making a larger down payment has advantages, which include:
- A better mortgage interest rate. Lenders may shave a few fractions of a percentage point off of your interest rate if you make a larger down payment. When you borrow less of the home’s price, there’s less risk for lenders, and they tend to reward this with more favorable terms
- More equity in your home right away. Your home equity is your home’s value minus the amount you owe on your mortgage. In other words, it’s the extent to which your home is an asset rather than a debt. More equity means more wealth.
- A lower monthly mortgage payment. Borrowing less of your home’s price lowers your principal, which also means you’ll pay less interest over the life of the loan.
- Lower upfront and ongoing fees. Low- or no-down-payment government-backed mortgage programs reduce lenders’ risk by guaranteeing a portion of the loans. If a borrower defaults on one of these loans, the associated government agency will reimburse the lender. In order to offset some of that cost, these loans can come with significant one-time costs, like the VA funding fee, or added ongoing costs like FHA mortgage insurance.
A lower down payment can get you to your goal of homeownership more quickly, but a higher down payment might cost you less overall. With low- or no-down-payment loans, you pay for the guarantee through fees or mortgage insurance, depending on the program.
Conventional mortgages usually require you to pay for private mortgage insurance if you put down less than 20%. Trying out some different scenarios with a mortgage calculator that includes PMI can help you better understand how changing the size of your down payment can affect other costs.
While thinking about the deposit – how much you should put down on a house, there are many other factors to consider while getting your finances in order for one of the biggest purchases of your lifetime. Feel free to reach out and begin a conversation. I am here to help answer any questions you may have. I invite you to connect with me on Facebook and Instagram.