You might be tempted to pour all your available cash into a down payment on your house. After all, the more you can put down, the lower your monthly payment will be. Sometimes, a bigger down payment will get you a lower interest rate. But hold off before you make that final calculation.
Traditional wisdom would say you need a 20 percent down payment, but that number is unrealistic for most first-timers, many of whom have outstanding student loans or other debt. Buyers who come to the table with less than 20 percent of the purchase price will most likely have to pay private mortgage insurance, known as PMI, to protect the lender from possible default. The more you can put down, the less you have to pay in PMI. (PMI will be covered in depth in an upcoming post.)
Getting as close as possible to 20 percent isn’t necessarily a good idea, though. Homeowners need to maintain a cash cushion to cover emergencies (at least $1,000) and long-term house maintenance. And if you wait to save for a bigger down payment, interest rates could rise, boosting your monthly payment.
Many people buy homes after putting down about 5 percent, and different loan types can move that number around to your advantage. For example, if you qualify for a mortgage insured by the Federal Housing Administration, you might be able to put down as little as 3.5 percent. Federal programs for veterans allow for no down payment, as do some loans offered through the U.S. Department of Agriculture. Talk to your lender about what makes the most sense for you.
And don’t forget: The money you’ve saved for your down payment might also shrink when you calculate out-of-pocket closing costs and escrow expenses. It’s important to have a realistic household budget before you settle on a home budget, no matter how much you have sitting in the bank. As a prospective buyer, spend the time to research scenarios and figure out how you’ll come out ahead given your specific circumstances.
Check out all of our posts in our home buying and selling series!
The blog and its opinions are expressly that of its author and does not convey the opinions or strategies of the Credit Union and should not be considered financial advice. CommunityAmerica’s Mortgage offers are subject to credit approval and terms may vary based on conditions.