What is the right down payment size when buying a home?

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Making the right decision about your down payment is crucial.

Key points

  • You will probably need to put some money aside when buying a house.
  • Making a deposit of less than 20% may mean paying additional fees.
  • There are several factors you need to consider when deciding on your down payment amount.

Buying a home usually requires both putting some money aside and getting a mortgage to cover the rest of the cost. But how much down payment should you make when buying your property?

It may depend on your situation, so here are some key things to consider in order to make the choice that’s right for you.

How much does housing cost in your area?

Ideally, it’s best to put down a 20% deposit if you can afford it. A 20% down payment is the “gold standard” preferred by lenders, as it is a large enough sum of money that lenders are unlikely to incur uncompensated losses if they were to exclude.

If you can put down a 20% down payment, you can avoid being forced by a lender to pay for mortgage insurance that protects them. Mortgage insurance is an additional cost for which you are responsible, but you derive no direct benefit from it. More lenders will also be willing to lend you a loan when you put down 20%, and your rate will often be more competitive because the higher amount you deposit reduces the risk for lenders.

However, you should consider the cost of housing where you live to assess the feasibility of a 20% down payment. If you live in an area where the typical home costs $200,000 and you’re looking to spend around the average, then a 20% down payment might not be a huge burden since you’ll only need around $40,000. But if a starter home costs $900,000, saving a down payment of $180,000 is much more of a burden.

What type of loan are you interested in?

It’s usually possible to put as little as 3% down on a home — or, in some cases, put nothing down at all if you qualify for special loans like VA or USDA loans. However, loans with lower down payments may incur higher upfront fees and interest rates.

You should research different types of loans, the down payment requirements for each, and the fees you would pay for each type of loan. This will help you determine your down payment amount.

How long would it take you to save a deposit?

Once you have an idea of ​​the amount of a down payment based on housing costs and the minimum down payment required for the loans you are interested in, you can estimate how long it would take you to save down payments of different sizes.

If it would only take you a year or two to save up to 20%, this should ideally be your goal, as it will allow you to get an affordable loan while buying a home in a reasonable time frame.

But if it takes you many years to save 20% – and if you’re otherwise in good financial shape to buy – then you might want to make a smaller down payment so you can get into a home quicker and get started. build equity and benefit from property appreciation.

By thinking about these questions, you can decide how much down payment is right for you and make the best choice for buying a home.

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About Matthew R. Dailey

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