Down Payment Information for Home Buyers
The down payment on a home is the largest expense for a new homeowner, and it is an important factor when they are speaking with different lenders. Whether a hopeful homebuyer has been saving for one year or 10, there are a number of down payment options available to them. Learn more about how down payments work and what criteria to use before deciding the structure of a loan.
Down Payment Basics
The down payment on a property is the homeowner's introduction to equity. Most lenders want to see big down payments, because the more equity a person has in a home, the lower the monthly mortgage payments will be (and the more investment the owner will have in the property). And with mortgage affordability eroding in many cities and mortgage costs taking up more and more of homeowners' hard-earned money, the importance of a sizable down payment increases.
Nevertheless, whether a hopeful homebuyer has been saving for one year or 10, there are a number of down payment options available to them. Learn more about how down payments work and what criteria to use before deciding the structure of a loan.
The magic number for a down payment is to aim for at least a fifth of equity. Homeowners who put down less than 20% of the home's value will likely need to pay for private mortgage insurance (PMI). This additional fee covers an insurance policy opened by the lender in case the owner defaults on their payments.
Conventional mortgages will usually require 20% of a down payment. The upside to this high figure is that conventional loans offer the most savings over time. Not only will owners who put down 20% not have to pay for mortgage insurance costs, but the interest rates also tend to offer long-term savings. However, conventional lenders ideally prefer closer to 30% of a down payment if buyers are looking for the best possible terms.
With an insured mortgage, buyers can put down as low as 5%. This is a great perk for a buyer who sees a time-sensitive investment opportunity.
While buyers may have to pay the costs of the insurance, the overall benefits outweigh the extra price. Experts recommend that buyers speak with a mortgage specialist to learn more about how to structure the down payment, insurance costs, and closing fees.
Down payments have a lot to do with the buyer's course of homeownership. While the upfront costs are going to be high for any buyer, the overall savings of a high down payment generally outweigh the initial expense. However, in some cases, it will make more sense for the buyer to make a lower down payment.