One of our biggest dreams in life is owning a home. Also, buying a house is never an easy task. The reason why preparation is necessary is because homes are expensive. If you’re planning to buy a home, you must be prepared for the out-of-pocket costs that come with it. Once you complete the gruelling process of finding the new home you like, then you are faced with yet another difficult decision – how much for a down payment?
Although there are zero down payments available, making a down payment, even a small one, can help reduce your monthly payments and overall interests charges.
Why do you need a down payment?
Many have been having difficulty saving for down payment, which, ideally, is 20% of the property value but can be as low as 5%. A down payment is essentially a safety net for lenders if you were to ever fall behind on payments.
How much money should you dish out for the down payment?
When deciding how much money to put down, you should remember that the higher the down payment, the lower your mortgage will be, and thus, the lower the amount of money you will have to pay each month. If you are in a position where you can put 20% down, it is in your best interest to do so. However, don’t fret if 20% is out of your reach. Just try to save up at least 5% of the home value. You will also need to take into consideration all of the costs of the loan (such as closing costs or inspection fees) that are also considered out-of-pocket expenses when making your decision.
How will you raise the money for the down payment?
First, you will need to figure out how much home you can afford. There are numerous calculators online to help you determine what your possible monthly payment will be. Once you have a home value estimate, you can then decide, how much you want to put down, 5%, 10%, or more? Once you have that in mind, you can start working towards saving for that goal.
Smart savings is one way of generating the money you will need for a down payment. Budget wisely, and frugally, in order to help reach your savings goals. Don’t lose hope – saving a couple of thousands if dollars is not easy feat, it will take time.
Avoid taking out a loan to serve as your down payment as you will only dig yourself further into debt and can put yourself in a difficult situation financially down the road.
Example of a down payment
If your home budget is at $200,000, then 20% would be $40,000; 10% would be $20,000; and 5% is $10,000 down. Whatever amount you can put down, is less you have to borrow. So if you put down $40,000, you only need to get a home loan in the amount of $160,000; 10% would bring the loan to $180,000; and 5% would require a loan of $190,000. So, the more you can put down , the less you will have to borrow.