People who are buying their first house typically have a challenge with coming up with the down payment for the home loan. A recent MPA survey revealed that confusion in regards to down payment requirements was one of the main reasons people in the U.S. delay becoming a homeowner, so we’ll discuss some strategies in this article.
The size of the down payment will vary a great deal depending upon your home financing program. For most of the population, the days of zero down home buying are fading, unless you can qualify for a VA home loan or USDA rural financing.
If you are going to buy a house, it is a near certainty you will need to save a good chunk of money for the down payment. Below are some of the most important reasons to get started on saving for your home loan down payment:
#1 Saving Takes Time
Most down payments for a new home are tens of thousands of dollars. For a conventional loan, the typical down payment is 20%. This is $40,000 for a $200,000 home. This takes a long time for many people to save up.
Fortunately, you do not necessarily need to have 20% down to buy your home. Today there are mortgage programs available that allow you to put down less money.
One of the most popular mortgage programs is the FHA. This program is backed by the federal government, and you may be able to put down a mere 3.5%. For a $200,000 home, this is just $7500. That is an amount that many people can save up in a year or even less.
There also are Fannie Mae and Freddie Mac mortgage programs available today with only a three to five percent down payment required.
It is important to sit down with your mortgage lender as soon as you can to get an idea of how much home you can afford, and which down payment home loan programs you can qualify for. At that point, you will have an idea of how much money you need to save.
#2 Putting Down More Lowers Your Payment
It is true that putting down a hefty down payment takes a lot of financial effort, but when it comes to your loan payment, saving money pays off. The higher your down payment, the lower your mortgage payment. Having the financial discipline to save up 20% for a down payment pays off in the long run because you can enjoy a much lower monthly payment for many years.
#3 Stop Paying Rent
Sure, saving up thousands of dollars to buy a home is a pain, but buying a home is worth it in the long run. Today, the home ownership rate in the US is near a low of 62%. That means there are millions of people renting where they live.
Buying a home allows you to build up equity in your property, which is one of the most important ways that Americans grow wealth. We are seeing more and more aggressive opportunities for first-time homebuyers worth reviewing.
The sooner you stop paying rent, the sooner you can begin to grow your wealth through home ownership.
#4 Easier to Get a Home Loan
The more money you put down on a property, the easier it generally is to get a qualified for traditional home financing. Banks and lenders like to see that the home owner has some skin in the game. People who have put more down often get a faster mortgage approval. Plus, you often can get a lower interest rate if you put more money down. The less money you put down, the higher the lender’s risk, and the higher your rate.
If you have had credit troubles in the past, such as a foreclosure, it also is helpful to have a large down payment. Having more money in the deal will ease the lender’s mind.
#5 Grow Equity Faster
With a larger down payment, you will be able to grow the equity in your property faster. This gives you a greater amount of the property that you own. When you put more down, you own that much more of your property. And you are that much closer to having the property paid off and owned by you in full.
#6 Stop Paying for Mortgage Insurance
It is helpful to put less than 20% down for a mortgage as it is easier to save up the needed funds. But you will need to pay for mortgage insurance each month until you reach approximately 20% equity in the home.
Private mortgage insurance can cost you $100 per month or more. So, if you have the means, it is recommended to make the 20% down payment home loan so you do not need to pay PMI. (Ask about no-PMI loans.)
Buying a home of your own is part of the American Dream. A key part of that dream is saving enough money for your down payment. The more that you can put down, the more financial benefits you will enjoy in the long run. Yes, putting down 3-5% is easier, but you will own more of your home if you put down 20% or even more.
References: Buying a Home and Saving for the Down Payment. (n.d.). Retrieved from https://www.nerdwallet.com/blog/mortgages/buying-a-home-saving-down-payment/ , Down-payment Misconceptions to First Time Buyers Retrieved from http://www.mpamag.com/news/downpayment-misconceptions-are-hindrance-to-firsttime-homebuyers–survey-68118.aspx