Determining how much money to put down is a major step in the home buying process and will likely be the largest up-front cost when it comes to purchasing a home. A smart down payment percentage varies depending on a variety of factors, including the type of loan, how long you plan to be in the house and your interest rate. Let’s start with the basics.
What is a down payment?
A down payment is the amount of cash you invest in your new home at the time of purchase. For example, if your new home costs $250,000 and you want to put 20% down, you would need $50,000 in cash.
When should I put 20% down?
Putting 20% has been the long-standing gold standard of purchasing a home. 20% is a significant investment in your home and gives you a sizable amount of equity as a homeowner. This amount is often ideal for more financially established buyers or those with a larger cash or savings reserve. MSN Money offers some more insight on the benefits of larger down payments.
Here are a few other pros to consider when debating how much to spend on your down payment:
- A smaller monthly mortgage payment
- Gives you more equity in case you need to move and sell
- No private mortgage insurance
- Less risk when selling
What about putting a smaller percentage down?
Putting 20% down on a home can be a chunk of change and is not ideal for everyone – especially for young couples or first-time home buyers. Fortunately for those folks, many lenders offer loans that require a smaller down payment.
Here are some of the benefits to putting less than 20% down:
- More cash on reserve for emergencies
- Likely to become a homeowner faster, since you won’t have to save as much cash
- Allows you to have a financial cushion for your lifestyle
Deciding how much to put down on a home is very case-by-case. You’ll want to be sure to carefully evaluate your financial situation and consult with a mortgage professional before deciding what a good percentage is for you.
Check back next week for part four of our Home Buyer blog series, “What do you need when to apply for a home loan?” Happy house hunting!