How Much to Put Down On a Home
Many first-time home buyers struggle to amass the cash needed for a down payment and closing costs. Earlier this year, Zillow’s Housing Aspirations Report noted 67.9 percent of renters nationwide cited saving for a down payment as the most significant hurdle for buying a home.
Maybe you’ve heard that a 20 percent down payment is standard. Perhaps you’ve heard about programs that offer low or no down payment loans. Whether you’re having trouble saving a big down payment or are sitting on a mound of cash and just hesitant to put all of your eggs in one mortgage basket, we’ll cover everything you need to know about how much to put down on a home.
What is a down payment?
The down payment is a percentage of your home’s purchase price that is paid up front when you close your home loan. The down payment plays an important role when you purchase a home because lenders look at your down payment as evidence that you’re willing to put some skin in the game. Whatever you don’t cover with your down payment, you’ll finance through your lender.
A down payment doesn’t just influence how much you’ll need to borrow. It can also impact:
- Whether you’ll have to pay for private mortgage insurance (PMI),
- What type of loan is best suited for you, and
- Your mortgage rate.
How large a down payment will you need to make? That depends on the purchase price of your home, your loan program and your credit score. Different loan programs require different down payment percentages, usually ranging from three percent to 20 percent.
Do I really need a 20% down payment?
The 20 percent rule comes from guidelines set by Fannie Mae and Freddie Mac, the government-sponsored entities that guarantee most of the mortgages made in the U.S. To conform to Fannie and Freddie guidelines, a buyer must either put 20 percent down or pay for
A 20 percent down payment is considered the gold standard in buying a home. And there are some pretty convincing arguments for putting down that chunk of change.
Advantages of a 20% downpayment
No private mortgage insurance
Michael Shea , a certified financial planner with Applied Capital in Nashville, Tenn., says he always encourages people to do their best to put 20 percent down on their home purchase in order to avoid paying PMI.
PMI is extra insurance that lenders require from some homebuyers who obtain loans with a down payment less than 20 percent of the sales price. PMI protects the lender – not you – if you stop making payments on your mortgage.
PMI may come in the form of a monthly premium added to your mortgage payment, an up-front premium paid at closing, or both. The premiums depend on the mortgage insurance provider, your credit score and the amount you put down . In other words, someone with an excellent credit score and a down payment of 15 percent can expect to pay a lower premium than someone with an average credit score and only 5 percent to put down.
Lower overall costs
A bigger down payment means you borrow less, which means you’ll have a smaller, more affordable monthly mortgage payment. You may even be eligible for a lower interest rate.
Often, lenders charge less interest for a loan with 20 percent down than they would for a loan with a smaller interest payment. Over the course of a 30-year loan, a lower interest rate can save you thousands, or even tens of thousands of dollars, depending on how much you borrow.
Most but not all mortgages conform to Fannie and Freddie rules. Low down payment programs are available through government-backed programs and individual banks. If you don’t have 20 percent down but have some money saved, or would feel more comfortable hanging on to your cash, there are arguments against making a large down payment.
Disadvantages of a 20% downpayment
You can’t get your money back (easily)
When most of your liquid assets go towards a down payment, your money will be tied up in the house. Although having equity in the home is a good thing, if you experience a job loss or another financial event that leaves you needing cash, it’s not easy to get your money back without selling the home or applying for a home equity loan or line of credit.
Your investment is at risk
People tend to think of buying a home as an investment. But like most investments, buying a home comes with risk. If you put 20 percent down on a home and home values fall, you could wind up with no equity in your home when you’re ready to sell.
Shea says it all comes down to what you want to accomplish and having an understanding of the opportunity costs. “This ensures you’re in a good place monetarily before, during and after you buy the home,” Shea says.
What happens if I put down less than 20 percent?
It’s easy to talk about the pros and cons of putting 20 percent down on a home, but what does it look like in real numbers?
Let’s take a look at two buyers, each with excellent credit scores, buying a home valued at $250,000 on a 30-year fixed mortgage.
Katherine is putting 20 percent down and is eligible for an interest rate of 3.25 percent. Steve is putting down 5 percent and he receives an interest rate of 3.50 percent.
|20% Down Payment vs 5% Down Payment|
|Monthly principal and interest||$870||$1,066|
|Monthly mortgage insurance||$0||$150|
|Total interest over 30 yrs||$113,200||$146,260|
|Total PMI over 30 yrs||$0||$54,000|
In this example, Katherine was able to save $87,060 ($33,060 in interest and $54,000 in PMI) over the course of a 30-year loan by making a 20 percent down payment.
Should I put down more than 20 percent?
Although 20 percent is commonly advised as a down payment, it is always possible to put down more. But if you have that kind of money available, should you?
The upside of a larger down payment is that you’ll have instant equity in the house and you won’t have to pay PMI. With a larger down payment, may even be able to negotiate a lower interest rate or lower closing costs.
But before you empty your savings account, consider the potential downsides to making a bigger down payment:
Low or no cash reserves
If you put all of your savings towards a down payment, you may not have any money left in the event of an emergency. Job loss, serious medical issues, significant home repairs and other financial surprises could happen before you’ve had time to rebuild your emergency fund. Without any cash reserves, you may have to rely on credit cards, tap into your retirement savings or sell the home to cover such unexpected expenses.
Competing financial goals
There are typically tradeoffs with competing financial goals when someone is saving up a large down payment. To come up with more than 20 percent down, you may have foregone or cut back on saving for retirement. Perhaps you have existing credit card debt or other loans that you haven’t been paying off aggressively because you’re saving for a down payment.
In this case, it’s a good idea to balance putting a down payment on a house with other financial priorities, such as saving for retirement and getting out of debt.
Low down-payment mortgage options
With the median price of a new home in the U.S. well over $300,000, it’s not surprising that many people have a hard time coming up with 20 percent down. Fortunately, whether you just don’t have that much cash or would prefer to put your money to work elsewhere, there are many options available.
Here’s an overview of some of the best low down-payment mortgage programs.
|The Best Mortgage Option for a Low Down Payment|
|Type of loan||Down payment requirement||Mortgage insurance|
||Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment|
|SoFi||10%||No mortgage insurance required|
|HomeReady||3% and up||Mortgage insurance required when homebuyers put down less than 20%. Can be removed once the loan-to-value ratio reaches 78% or less|
In addition, you may be eligible for down payment assistance or other programs designed to help potential buyers get into an affordable home.
Down payment assistance programs
Good Neighbor Next Door
The Department of Housing and Urban Development (HUD)’s Good Neighbor Next Door program is available to law enforcement officers, teachers, firefighters and emergency medical technicians buying homes in certain communities designated as Revitalization Areas.
The program offers eligible borrowers 50 percent off the list price of the home if the borrower commits to using properties located in these communities as their sole residence for 36 months. Under the Good Neighbor Next Door program, eligible buyers can purchase a home with as little as $100 down.
Borrowers don’t have to be first-time homebuyers to take advantage of the program. However, they cannot own any other residential property at the time they submit an offer to purchase a home, or for one year prior.
Eligible borrowers should first get pre-qualify for a loan through the FHA, the VA or another program. Then check listings in your state to find an eligible property. Follow the instructions to indicate your interest in a specific home.
The Operation Hope Home Buyers Program helps low-wealth individuals access funding for homeownership without resorting to subprime loans.
Potential homebuyers are connected to financial institutions, government-backed loan programs, down-payment assistance programs, realtors, and other resources that can help people with low to moderate income buy a home.
The program is available at all HOPE Inside locations in 21 states. It includes a home-buying workshop and HUD-approved counseling to help borrowers overcome bad credit and other potential barriers to homeownership.
National Council of State Housing Agencies
Many states and local agencies and nonprofit organizations have programs aimed at assisting residents get approved for a mortgage. Search resources in your area using the Housing Finance Agencies (HFA) Directory.
The programs vary by location, but programs typically provide competitive interest rates, low or no down payment programs and assistance with closing costs. They may also be able to connect you with government-backed or conventional loans that fit your circumstances.
Can I put no money down and still get a mortgage?
Many potential buyers assume that zero down payment loans ceased to exist after the mortgage market downturn of 2008. But some programs survived and are still available today.
|The Best Mortgages for No Down Payment|
|Type of loan||Down payment requirement||Mortgage insurance|
|VA Loan||No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)||No mortgage insurance required; however, there may be a funding fee, which can run from 1.25-2.4% of the loan amount|
|USDA||No down payment required||Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price|
|Navy Federal||No down payment required for eligible borrowers (restricted to members of the military, some civilian employees of the military and U.S. Department of Defense, and family members)||No mortgage insurance required; however, like the VA, there may be a funding fee of 1.75% of the loan amount, which can be financed into the loan.|
So, what’s the right amount for a down payment?
When it comes to deciding how much to put down on a home, doing the math is the best way to go.
First, determine how much you have available for upfront costs, including your down payment and closing costs, which average around 2 percent of the purchase price of the home . Make sure you’ll still have some savings left over for emergencies and other savings goals.
Next, talk to multiple lenders to find out what programs, down payments and interest rates are available in your particular circumstances. With a small down payment, you may receive a higher interest rate on your loan or have to pay PMI, or you may be able to avoid both depending on the products and programs for which you qualify.
Finally, run the numbers using a mortgage calculator to see how much you’ll save or spend with a smaller or larger down payment. If you don’t have enough savings to afford the down payment you need, look into down payment assistance programs.
As with most aspects of buying a home, the mortgage program that works for someone else may not be right for you. The ideal down payment on a house depends on your financial situation and overall goals. The fact is, not everyone needs a big down payment to buy a home, and some people don’t need any down payment at all. Take time to talk to lenders, explore your options and compare costs to make the best, most-informed choice.