Understanding Down Payments

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WHAT DO YOU NEED TO KNOW?

Knowing you are ready to buy a house is a great thing. Many people think that buying a house is expensive. When it comes to buying a house and understanding how much cash you need up front, you will want to understand both your down payment and the necessary closing costs. Today we want to take a close look at your down payment. This can be the largest variable in determining your immediate costs.

The amount of down payment due when you close on your home will usually be determined by the type of loan program you choose. Title companies will generally want a cashier’s check or a wire transfer to complete your part of the transaction on the day of closing. There are loan programs to fit many needs and situations. Conventional loans may require a down payment of up to 20%. That means if you are looking to purchase a $150k home, you will need roughly $30,000 for your down payment. That can be a hard pill to swallow for most people. However, homeownership can be more affordable up front through a different loan program such as the FHA program, which only requires 3.5% of the value of the home as a down payment. Meaning for that same house you would only be out of pocket $5,250 for your down payment. With the VA loan program, you don’t have to make a down payment at all. There are also at least another half dozen loan programs you can get pre-approved with like NACA and USDA, so you will want to pay attention to the type of loan program you are being pre-approved for and the down payment it requires.

So what else should you keep in mind? Well there are a few other key considerations. First, in most cases, when you put less than 20% of the value of the loan down as a down payment, you will have to pay some type of insurance premium usually called “PMI”. We have already discussed PMI, but just as a refresher, if you owe more than 80% of the value of your loan (hold less than 20% equity) the lender is lending money to you at a higher risk of foreclosure. Because of this, you pay an annual insurance premium at a rate somewhere between .3% and 1.2% of the value of your loan. This is important to consider and will raise your monthly mortgage payment. 

Secondly, you will need to consider how long you plan on living in this home. Is this your forever home? Are you relocating for work and uncertain? Is it a five-year plan? You will want to take the length of your homeownership into consideration. The less you put down, the less equity you have in your home. Keep in mind that it cost money to sell a house, so if you plan on selling in two to three years, you will want to put a sizable amount down. If you do not, you may find yourself in a position that will require you to pay more money to sell your house if you have not established enough equity to cover your expenses. This is a complex topic and depends on the stability of the market, but it is a key consideration that you will want to discuss with an experienced agent. 

Obviously, the less money you borrow, the better financial position you are in. So deciding on a down payment that you are comfortable with will be important. There are several considerations to take into account and you may want to run all of your ideas by your agent, remember, they are there to help put you in the best position to reach your goals.

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