A down payment is the initial payment that you make when purchasing a home. The money is applied entirely to your equity in the home. This in turn lowers the amount you have to end up financing on the mortgage. For example: If you buy a home for $500,000 and you make a down payment of $40,000, your mortgage will be financed with $460,000 owing in principal instead of $500,000. This is beneficial to you because the lower your mortgage amount, the less interest you will pay overall.
This depends on what kind of mortgage you get and who your lender is. Down payments aren't always required, especially if you’re approved for a government-backed mortgage, such as a VA loan or USDA loan. In most instances, however, you'll probably be required to make a down payment. Lenders may even require you to put down a certain percentage of the home’s value.
20% is often seen as the “magic number” when it comes to how much you should put down (though that number may not necessarily be required by your particular lender). As long as you can afford it, a larger down payment will generally benefit you in the long run.
For example: Let’s say you’re purchasing a home that’s worth $550,000. You finance a conventional 30-year mortgage at a rate of 4.125%. The minimum amount required for a down payment is 5% ($27,500). With these figures, you’re looking at a monthly mortgage of about $2,532 in principal and interest alone. However, with a down payment of 20% ($110,000), your monthly mortgage payment will total around $2,132. Though a 20% down payment is significantly larger than 5%, you’ll end up paying less interest on your payments.
Keep in mind that principal and interest aren’t the only things you be paying. Other expenses can include home insurance, private mortgage insurance (PMI), taxes, and homeowner’s association (HOA) fees.
If you’re able to put at least 20% down on a home, you won’t be required to pay for PMI. PMI protects the lender if the borrower defaults on their mortgage. Additionally, the higher your down payment, the more likely it is that your offer will be accepted. For instance, imagine that a seller receives two offers on a home. The first offer includes a down payment of 20% while the other’s down payment is 5%. The seller will likely accept the first offer with 20% down.
On the other hand, it can take a long time to save the money you'll need for a large down payment; and once you're finally able to put the payment down, you probably won't be able to get the money back. This takes money out of your pocket for other things, such as home repairs or daily living expenses.
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