Today on myth busters home loan edition: Should you put down a deposit of 20% for a down payment when purchasing your home? The Home Loan Expert is here to debunk the myth that you must commit to a down payment of 20% when purchasing your home.
Conventional wisdom tells us to put down 20% on a mortgage. With all of the different loan types available to homebuyers, this wisdom is no longer necessary or true. Let’s take a look at how much a down payment on a house will affect your purchasing power and monthly payments.
How Do Down Payments Compare Across Various Loan Types?
Down payment requirements vary across other loan types. Some loans, like the VA loan, don’t even require a down payment thanks to its partial federal-backed guarantee.
- FHA Loan (backed by the Federal Housing Administration): 3.5% down payment minimum
- VA Loan (backed by the Department of Veterans Affairs): No down payment required
- Fannie Mae HomeReady Loan: 3% down minimum
- Conventional Loan (with PMI): 3% minimum
- Conventional Loan (without PMI): 20% minimum
- USDA Loan (backed by the U.S. Department of Agriculture): No down payment required
- Jumbo Loan: 10% down
The data above shows the minimum down payment requirements based on each loan type. If you are in the position to do so financially, you can put down a larger down payment on your home.
How do I Calculate How a Down Payment will Affect my Monthly Payments?
A down payment calculator provides you with an easy way to see how your down payment translates to your home price and monthly payment. Fill in the inputs for the fields below to get started:
- Down Payment. This is the amount you plan to deposit on your down payment.
- Interest Rate. Your interest rate will be straightforward on a fixed-rate loan, remaining constant for each monthly payment. For an adjustable-rate mortgage (ARM), your interest rate will usually be set at a lower competitive rate during the negotiated initial period. Once the initial period ends, you will switch to a variable interest rate that fluctuates in alignment with market trends. This could cause your monthly payments to go up or down depending on the status of the economy.
- Term in Years. This is the period over which you agree to repay your loan. Most loans are issued in terms of 15 or 30 years with 10 and 20-year loan options also available. Shorter loan terms require more aggressive monthly payments but can save you thousands of dollars otherwise spent in interest over the life of your loan. Longer loan terms offer more affordable monthly payments, which could increase your purchasing power.
Should I Try to Make a Larger Down Payment?
Although making a larger down payment can put you in a better position financially, it isn’t always necessary. For one, there are homeowner’s assistance funds to help cover the cost of a down payment.
Otherwise, the main deterrent that says you must make a 20% downpayment on your home comes from having to purchase private mortgage insurance (PMI). While it is extremely likely that your lender will add a PMI fee to your loan until you are able to reach 20% of your loan’s total value, this fee typically costs 0.5 to 1% of your loan amount per year. While this fee is not insignificant, the appreciating value of your purchased home should outweigh the drawback of having to invest in PMI. Plus, as more monthly payments are made with time, you can say bye-bye to PMI and hello to your home’s most valuable asset: the built-in equity.
On the other hand, the ability to put down a larger down payment strengthens your loan application’s chances for approval. You will also be eligible for better rates and terms on your loan as a reward for posing less risk to your lender from defaulting on your loan. You can also save money by shortening the life on your loan.
Follow these guidelines to determine what you should contribute to your down payment:
- Use a mortgage calculator to see how your down payment amount affects your monthly payments.
- Determine a budget that also takes into account an emergency fund. It is recommended to aim for an emergency fund equal to three months worth of living costs and expenses.
- Try not to spend your savings all in one place. In this case, it’s your down payment. You’ll still need enough money to get by after you buy your home.
Ultimately, the optimum down payment amount will depend on your goals and financial situation. If you have the financial fortitude to do so, a larger down payment will mean a lower monthly payment. Conversely, you don’t want to find yourself in a tight spot, strapped for cash after you move in.
What Else Matters in Relation to My Mortgage Down Payment?
A down payment matters, but other financial factors should also be taken into account when determining if you are financially secure to purchase a new home. Your lender will evaluate your credit score, debt-to-income (DTI) ratio, proof of a steady income, and other financial statements that speak to your credibility as a reliable borrower. You’ll also want to ensure that you are able to comfortably manage your monthly payments. The key is to find a balance between the relationship of all of these financial factors when shopping for your dream home.
How Can The Home Loan Expert Help?
Each home buyer’s unique financial situation will influence what kind of down payment they are able to put down on a mortgage. An interest calculator is a good place to start when you are trying to get an idea of how much of a down payment you should commit to when budgeting for your monthly payments. Our knowledgeable team of friendly lending Experts will help guide you to determine which loan type best lines up with your down payment goals.
The Home Loan Expert team comes from the same communities we serve, making us better able to help get you the best deal possible on a loan. We are available to discuss how to make the rates and terms on your loan best serve your budgeting needs and financial goals. Our in-house underwriting process allows for us to efficiently issue loan approvals, with closing times in as little as two weeks!So call us up at 866-221-1926 to speak with one of our bright lending Experts, whose mission is to help put you in a better financial position by getting you the best deal possible on your loan. We can also be reached through our online chat service to find out how much you should realistically expect to spend on a down payment on your dream home.