How Big of a Down Payment Should You Make?
When buying their first home, many buyers find that making the down payment is the biggest challenge. As a result, both government and conventional mortgages offer a range of choices based on how much of a loan you qualify for and your credit history. To meet your background, the typical down payment varies from five to twenty percent of the total loan.
But is this all you should pay? Adding to the ever-growing complexities of purchasing your first home, consider the following factors:
The Loan’s Minimum
You may have heard that 20 percent is the standard for loans and, for many conventional ones, this amount is expected. However, not everyone can put this amount down. To make home ownership available to more individuals, certain programs offer lower options:
- Connecticut Housing Finance Authority (CFHA) loans – Depending on your credit history, you can qualify for a down payment as low as 3.5 percent.
- Freddie Mac conventional loans – Programs like HomePossible mortgages and HomePossible Advantage mortgages let buyers pay as little as zero percent up front.
- Veterans Affair (VA) and United States Department of Agriculture (USDA) loans – If you qualify for either of these two government programs, your loan has no down payment.
- Jumbo loans – An option going over the conventional loan limit, these programs for buyers with stellar credit and financial backgrounds offer down payments as low as 10 percent.
Although you might be able to make that three- or five-percent down payment, should you be aiming that low? Some experts say that, even with these types of loans, you should still go higher. Specifically, during your loan application, if it looks like you have the funds and financial means to hit that 20 percent mark, your chances of being approved increase.
On the flip side, although lenders have programs like Federal Housing Administration (FHA) and USDA loans available, they’re still considered higher-risk programs. As a result, even if you do get approved and you plan to make that lower down payment, getting to this step further involves more fees, a higher rate and additional costs.
All Upfront Costs
First-time home buyers should be aware that you’ll have to pay more than the down payment. Depending on the loan you’re approved for and ultimately select, this initial amount further encompasses:
- Mortgage insurance, or Private Mortgage Insurance (PMI)
- General closing costs
- Any guarantee or funding fees
With a higher down payment, some of these fees may be smaller or not required.
What You’ll Pay Long Term
Don’t just consider what you’ll be paying upfront. Rather, your down payment creates long-term ramifications. Specifically, a larger down payment results in smaller monthly amounts during the loan’s lifespan.
Furthermore, if you can’t pay 20 percent, certain loan programs require you to pay mortgage insurance each month. Along with a higher monthly payment and rate, this factor adds to the loan’s overall costs and consumes a greater portion of your monthly income.
In terms of budgeting, additionally consider your income each month. If, in the home-buying process, you’ve amassed a large amount for the down payment and other upfront costs, but you don’t have a large monthly income, starting off big and opting for lower monthly costs ultimately saves you more over time. As an asset, you’ll start off with more equity in your property.
Long-Term Market Changes
Is it possible to make a payment that’s too large? Although there’s no specific limit, analysts have found that, particularly for the buyer looking to sell later, paying too much up front also has its risks, including:
- A potentially lower return on investment when you put your home on the market five to 10 years later.
- If and when the market drops, you’ve already paid too much on a property that’s now devalued.
Are you navigating the home-buying process and need assistance or pre-approval? Include Ion Bank in your search! To learn about different types of loans or to begin a mortgage application, stop by today or give us a call.
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