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Buying a home requires a down payment, something that not many buyers have sitting in their bank account. For many potential homebuyers, the down payment is the most difficult hurdle to get over, holding them back from getting the process started.
Below, we’ll take a look at the down payment, explaining what it is, how it works, and how much you should put down when purchasing a home.
What’s a Down Payment?
When you make any large purchase, you have the option of putting money down. That means that you can add a substantial amount to the overall cost, meaning that you will ultimately finance less. While some purchases allow you to choose, when buying a home, you’re given a percentage.
If you’re asked to put down 10%, that could be a large number depending on the price of the home. 10% of a number like $300,000 is $30,000, not something that every potential home buyer has sitting in their bank account.
The Bigger the Better
When it comes to down payments, they work wonders for the financing of larger purchases. First of all, they reduce the overall rate that’s needed to finance, reducing the rate and the time needed to pay off the purchase. On top of that, they decrease the rate that lenders give for mortgage rates, seeing it as a gesture for responsible saving.
When you put a bigger amount down, you can expect:
- A lower mortgage interest rate
- Lower fees altogether
- A chunk of equity in your home instantly
- A lower monthly mortgage payment
One of the main reasons why lenders are willing to reduce the rate is because they view down payments as less risky, knowing that you have a lower amount to finance and that you have the ability to save up your money over time.
How Much Should I Put Down on a Home?
Knowing the benefits that come along with putting money down on a home, the next question is how much should you put down on your home? Well, that depends on the total and the requirements of your lender. While the bigger the down payment the better off you’ll be, not everyone has that kind of money lying around.
Before calculating the down payment that you should put down on your home, you should consider a few things.
- Your budget – If it gets in the way of the things you need daily, weekly, and monthly, it might be too much for you. Make sure that you leave some room in case of emergency or other issues.
- Your savings – while using your savings is recommended, it’s not recommended to completely empty it out. Leave some money in there just in case you need some wiggle room or some funds for emergencies or home repairs.
- Your mortgage rate – the more you put down, the lower your mortgage rate, and the lower your monthly payment. Do a few calculations and see how your mortgage rate changes with different down payments and decide the best one for you.
To get a better idea of what you’ll be expected to put down, the average in the United States is 6%. That amount is calculated along with the value of the home that you are purchasing to give you a final amount. With that rate, on a home that is $100,000, you’ll be asked to pay $6,000 down. While there are some cases where you could pay as low as 3%, it’s recommended to put down as much as you can to reduce your mortgage rate and the overall amount you’ll pay over time.
It’s About Balance
When it comes to choosing an amount to put down for your home, it’s all about balance. You want to put an amount down that allows you to still pay your monthly expenses but allows you to really get a good head start on paying down your home.
Buying a home is a big purchase, one that comes with a lot of responsibility. It takes planning and a bit of saving to gather up all that you need and score a low mortgage rate to make your payments affordable.