When buying a home, should you consider making a large down payment?

To buy a house ? Your financial situation and your goals determine when a larger down payment makes sense and when it doesn’t. (iStock)

When looking to buy a home, whether you can afford it is always a primary consideration. This includes the amount of down payment you want to make on your new home.

Arriving with the money for a down payment can be a hindrance for potential buyers. In 2019, the average down payment on a home or condo was 12%, according to the National Association of Realtors. For first-time buyers, the number drops to 6%.

However, if you have enough money to pay the 20% down payment, should you make the standard payment or is it beneficial for you to pay more?

If you are looking to buy a home in the current market, you can explore your mortgage options by visiting Credible to compare rates and lenders. Using an online mortgage calculator can also help you estimate monthly mortgage payments and lower home prices within your range.

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What is the amount of a standard down payment on a house?

The standard 20% down payment most people think of when buying a home is a point of reference. Some buyers save until they have enough to make the standard down payment, but having less than 20% won’t prevent you from getting pre-approved for a mortgage. However, the minimum down payment requirement varies by lender and mortgage program, so it is important to know the conditions before choosing a mortgage lender.

Borrowers who make the standard down payment often find it easier to get a mortgage. The 20% down payment lowers your loan-to-value ratio (LTV) and the lender would take less risk by financing 80% of the house.

For potential borrowers who cannot afford the 20% down payment, lenders will likely view the loan as a riskier investment. As a result, borrowers are required to take out private mortgage insurance (PMI) when they make a down payment of less than 20% on a conventional mortgage. PMI protects the lender if the borrower does not repay the loan and the house is foreclosed.

There are mortgage programs that allow as little as 3% and others require no down payment. Here are some options:

  • 0% deposit: VA loans for veterans, active service members and surviving spouses; USDA loans for those shopping in rural and some suburban areas
  • 3% deposit: The 97 Conventional Loan, Fannie Mae’s HomeReady Mortgage, and Freddie Mac’s Home Possible Mortgage
  • 3.5% deposit: The FHA loan has a minimum down payment of 3.5% and the minimum credit score is 580 to qualify
  • Loan programs: Some lenders may only require a 3% down payment with no PMI payment requirement

You can explore your mortgage options in minutes by visiting Credible to compare rates and lenders. Discover Credible and get prequalified today.

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Pros and cons of putting a big down payment on a house

Making a larger down payment on a house has its pros and cons. By paying a larger down payment, borrowers can benefit from:

  • A smaller monthly payment: A larger down payment means a smaller loan and lower monthly payments.
  • No PMI: Borrowers must pay the PMI if they make less than 20% down payment. Borrowers pay mortgage insurance premiums with loans guaranteed by the FHA.
  • A better mortgage interest rate: Putting more money can give you a better interest rate on the loan.
  • Reduced closing costs: Some closing costs are tied to the loan amount. Small loans generally have lower closing costs.
  • Start with more equity: Home equity can be a long-term strategy for building wealth.
  • Pay off the mortgage sooner: Putting in more money can help you pay off your mortgage sooner.

The potential disadvantages of a larger down payment include:

  • Registration takes time: A 20% down payment on a $ 250,000 home is $ 50,000. Saving that much money could take years.
  • Savings drained: Setting up everything for a down payment could affect other savings, such as an emergency fund or contributions to a retirement account.
  • Opportunity cost: Mortgage interest rates are currently at their lowest, and borrowers can deduct mortgage interest on their income tax returns for the first $ 750,000 of the mortgage. It may be a better idea to make a smaller down payment and invest those funds elsewhere.

To find the best mortgage rate, start by using Credible. Credible can show you the current mortgage rates of several lenders and help you make an informed decision about your home loan.

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How Much Should You Save When Buying a Home?

The amount you put as a down payment when buying a home depends on your goals and your financial situation. Saving for a larger down payment may be worth considering if you prefer a lower monthly mortgage bill. Paying too much could mean sacrificing your other savings.

To get a better idea of ​​how the down payment amount determines potential monthly payments, you should use an online mortgage calculator. And if you have mortgage issues, you can also visit Credible to connect with experienced loan officers and get your mortgage questions answered.

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Have a finance-related question, but don’t know who to ask? Email the Credible Money Expert at [email protected] and your question could be answered by Credible in our Money Expert column.

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About Matthew R. Dailey

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