Buying a Home 101: Down Payment and Savings

Toy doll on top of a pile of cash

Toy doll on top of a pile of cashHaving enough money for down payment is probably the biggest struggle of many first-time homebuyers. In fact, it’s one of the main barriers to homeownership and the reason some people put up with renting and delay buying. Other things that hold people back include job security, debt, less-than-stellar credit and qualifying for a loan.

Mortgage lenders in Utah note that one major motivation for making a large down payment (at least 20%) is to avoid paying for private mortgage insurance (PMI) when obtaining a conventional loan. PMI covers the losses of the lender in case you default on the loan, but this means additional payment (monthly or lump sum) for the homeowner. There’s also a host of other benefits, such as:

  • Be considered as a less risky borrower
  • Get better rates (and less total interest)
  • Lower your monthly loan payments
  • Smaller home loan balance

Can you buy sooner with little down payment?

There’s no denying about the rewards of making a substantial down payment, but it can also keep you from buying sooner than you expect. If this is a big issue for you too, it is good to know that there are mortgages like the Federal Housing Administration (FHA) loans, which require a down payment of at least 3.5%. There are also conventional mortgages that allow a down payment of 5% or lower.

Low down payments allow you to buy a home sooner than later, especially if you don’t have enough money for a down payment. Just remember that doing so requires paying insurance premiums in government-backed loans and PMI in conventional mortgages. It’s good to know, however, that you can get rid of PMI in conventional loans once you have 20% equity in your home.

What if you strive to hit the 20%?

Woman giving her paymentIt’s up to you if you want to make a bigger down payment or hit the 20%. If you have the money to do so, it’s perfectly fine. But be sure not to spend all or most of your savings on the down payment. It’s still important that you have an emergency fund (three to six months of your living expenses) to avoid larger financial risks if problems come up.

Maintaining a savings cushion also brings the benefits of having spare funds for the unexpected costs associated with home buying. If putting large money down will leave you too short of cash, it’s better to save up first until you can come up with a good amount. It doesn’t have to be 20%; it can be 15%, 10% or lower.

How much should you pay?

The ideal amount is 20% of the purchase price, but this isn’t attainable for most buyers. It’s okay to make a down payment lower than 5%, but you have to know that doing so could mean that you might find yourself owing more money than what the property is worth. Hitting the bare minimum for a down payment isn’t always a wise financial move.

Keep in mind that with an extremely low down payment, it will be much harder to build equity. This also means that you may not be able to borrow against your home if you unexpectedly lose your job. And if you can’t pay your loan, you’ll have to default and may not be able to sell your home. It’s much better to pay about 10% or 15% to have more protection in case the housing market drops.

Buying a house is a financial decision that you have to live up for several years. Get in touch with a reliable lender to find how a certain down payment can affect your rates and payments.