Down Payment - Oro Valley Real Estate
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What is a down payment on a house?
The down payment on a house is a portion of the price of a home that’s paid in cash. The balance of the purchase price is usually paid by a loan you secure from a lender and pay back in a monthly mortgage payment. Down payments are expressed as a percentage of the total purchase price. The percentage you’re required to pay is dictated by the terms of your loan. Note that not all home buyers with financing are required to produce a down payment, but the majority of them are.
How much should I put down on a house:
The ideal down payment amount is 20% of the purchase price of the home.
Paying 20% upfront can:
reduce your monthly mortgage payments
eliminate costly private mortgage insurance (PMI)
reduce interest rates
improve the competitive nature of your offer
When trying to decide how much you should put down on a home, play around with a mortgage calculator to determine an amount that works best for your finances. As you explore, remember that in addition to your down payment, you’ll have some other upfront costs you’ll need to pay at closing, collectively called your escrow funds. It can include your closing costs, prorated taxes, title fees and more.
20% down reduces your mortgage payment:
The more money you pay upfront, the less you have to borrow from the lender, and the lower your monthly payment will be.
Let’s say you buy a $300,000 home at a fixed rate of 4.25%. The following payment scenarios exclude additional fees and costs such as taxes and insurance.
With a 20% down payment ($60,000), you’d borrow $240,000, and your monthly payment would be $1,548.
With a 5% down payment ($15,000), you’d borrow $285,000, and your monthly payment would be $1,950.
20% down eliminates private mortgage insurance (PMI):
When you put 20% down, that means you own 20% of your home. This allows you to avoid paying PMI, which is a monthly charge that’s rolled into your mortgage payment to protect the lender from what they see as a riskier loan.
Example: If you buy the same $300,000 home noted above, with 5% down, your PMI payments each month would be $181 until your equity reaches 20% of the home, or you refinance into a loan without PMI.
20% down improves mortgage rates:
Buyers purchasing with a 20% down payment can often get better interest rates. A higher down payment is considered a sign that you’re financially stable, and thus a less risky borrower in the eyes of your lender. Overall, your risk is determined by three key factors: your debt-to-income ratio, your credit score and your loan-to-value ratio. The more money you put down as part of your down payment, the stronger your loan-to-value ratio.
20% down makes your offer more appealing to the seller:
In a competitive market, a larger down payment can make your offer more appealing to a seller. This is because they’ll likely feel more confident that you won’t have financing issues at closing that could cause the sale to fail.
What is the minimum down payment for a house:
The minimum down payment for a house depends on the loan you’re using to finance the purchase. Some people may be able to qualify for loans with 0% down, but loans with 3% down or 3.5% down are common. Lower down payment loans, including the 3.5% FHA loan, are designed to make homeownership more attainable for first-time buyers.
Keep in mind that even if you finance with a loan that allows a lower down payment, you’ll usually still have to pay closing costs out of pocket. There are a few 0% down loan types that will roll all costs into the mortgage, but they can be hard to come by.
Conventional loan minimum down payment: 3%
FHA loan minimum down payment: 3.5%
VA loan minimum down payment: 0%
USDA loan minimum down payment: 0%