Here’s a few tips for assessing what the best home down payment amount.
One of the most important aspects of buying a home is deciding what your ideal down payment should be. There are some simple steps you can take to get started.
Ultimately, the amount depends on the purchase price of your home and the type of home mortgage you opt in for. A down payment is a percentage of the purchase price, and different loan programs require different percentages, ranging from 3.5-20% down payment. The more you can contribute, the more attractive you’ll be for lenders. With a higher down payment, you borrow less, and therefore pay less interest over the life of a loan.
If you can put down 20-percent, you won’t have to add private mortgage insurance (PMI) to your payments.
#1. Pick the Right Lender
Whether it be for a reverse mortgage or a fixed-rate loan, having a professional opinion can make a huge difference. The right advice is crucial when shopping around for the best mortgage rate. A good consultant will help lay-out options, know what loans and rates you’ll qualify for (before you apply), and tell you what to expect.
You may also consider sitting down with a real estate professional to review what your target market is like and what opportunities you can take advantage of when you’re ready.
U.S. Veterans qualify for a no money down VA mortgage loan, and won’t be required to buy private mortgage insurance (PMI). Furthermore, a VA loan can be used to buy a second home.
#2. Set Up a Savings Account
When you start saving for a home down payment, it is a good idea to keep your payment fund separate from the rest of your money. Naming your account “Start” or “Down Payment” to make it clear that the money is a good way to stay organized.
You will also need more cash than just the down payment. Lenders want to see that you aren’t living above your means.
A good strategy to jump-start your savings is to test potential home payments scenarios. Once you know the price range of your future home, you can estimate your ideal down payment.
Step-1: work with your lender to estimate your projected payment: principal, interest, taxes, and insurance & any additional fees for maintenance or utilities.
Step-2: subtract what you are currently paying in rent from this amount.
Step-3: put the difference in a savings account.
This not only helps you save, it gives you a realistic experience of the financial commitment required to own a home.
Let’s say your projected mortgage payment is $1,350, and your projected increase in utilities is $300 and your rent is $1,000/mo. So the increase you would expect to pay as a homeowner is $650. That’s the amount you would put into your savings account each month, to “try out” the payment.
#3. Keep Track of Your Spending
Get in the habit of regularly depositing money into your special savings account. You can also signup for an automatic savings program. It’s a good way to keep up with your goal, and you can view your monthly contributions online.
Another way to simulate your mortgage loan s that every time you receive cash at an ATM, you can transfer a little to your “new home savings account”. You can also set a predetermined amount to automatically deposit a fixed amount every week (or month) from your checking account.
#4. Start a Mortgage Savings Account
As your new savings account grows, you can choose to move it to an investment vehicle that earns more interest.
There are a ton of options, but you can start by asking your bank what they offer. And to help protect your savings from a loss in value, consider low-risk investments that won’t negatively impact your credit score.
High-Yield Savings Accounts
- Set up a high-yield savings account (such as a money market account) through your bank or financial institution. They’re super easy to set up and maintain, provide easy access to your money, and are insured by the FDIC up to $250,000.
Certificates of Deposit (or “CD”)
- If you can wait for a few months or more before you buy or need access to these funds, consider a CD. You should be able to get a higher rate of return than you would with a money market account. Find one with terms that fit your time frame, so you don’t get charged a penalty for early withdrawal.
- If you belong to a credit union, ask them about a product called share certificates. They’re not too different from a CD, and they may offer slightly higher rates.
Save Even More
If you’re feeling motivated and really want to speed up your savings efforts, take a look at four additional ways to save:
- Trim your budget: If you take a look at your monthly expenses, you can probably discover ways to cut back that won’t drastically affect your lifestyle. Maybe you’re eating less, or maybe you could consolidate your phone and Internet service. These small savings can really add up.
- Increase your income: Can you work more hours, or know a way to make supplemental income? It might help fast-track you to buying your new home.
- Decrease your rent: This option is not for everyone, but if you are paying a high rent and don’t plan to buy right away, consider moving to a less expensive place or finding a roommate to share current expenses. Reducing the size now will help you pay for what you want later.
You can also explore economic housing programs. The JumpStart program for example, is designed to help homeowners and renters during the COVID-19 crisis.
#5. Explore Your Options
Once you have an idea of how much you’ll need for a down payment, ask your lender which loan program fits your situation. If coming up with the down-payment is what’s standing in your way, ask your lender about FHA government-insured loans. If approved you’ll qualify for a downpayment as low as 3.5%, along with down-payment assistance programs.
Also ask your lender whether a lower down payment will require you to pay private mortgage insurance.
Watching your money add up can help you stay motivated and reach your savings goal. With careful planning and good money management habits, you’ll be much closer to homeownership. And in the end, the reward will be yours.