If you’ve been dreaming of becoming a homeowner, one big concern may be weighing on you: coming up with the minimum down payment for a mortgage. Show
The nationwide median home price for active listings was $435,000 in August 2022, according to data from the National Association of Realtors, down from a record high of $450,000. With prices falling, and bidding wars becoming less common, you may be considering buying a home. Depending on the type of mortgage you choose and your willingness to pay for mortgage insurance, you may be able to buy a home with a small upfront down payment. Let’s take a look at how much you really need in order to stop renting and start building equity in a home. What is the minimum down payment for a house?A down payment is the amount of money you contribute towards the purchase of a home. Think of it as the amount you initially put up as your share of ownership. The higher your down payment, the less you’re asking to borrow — and the lower your monthly payments will be. Lenders require a down payment for most types of home loans, but there are exceptions for certain types of buyers. Here are the basic down payment requirements for various types of mortgages:
Average down payment for a houseNow that you have an understanding of the minimum amount for a down payment, you might be thinking about another question: How much is the average down payment for a house? The most recent data from the National Association of Realtors shows that the average first-time homebuyer makes a down payment between six and seven percent. However, to get a closer look at typical down payments, consider what different types of buyers can afford. First-time homebuyers: 75 percent of first-time homebuyers do not put down 20 percent. In fact, the average first-time homebuyer puts down just 6 percent of the purchase price. Current homeowners: For those who aren’t new to buying a home, the average down payment is higher: 16 percent of the purchase price. Cash buyers: Some new homeowners with deep pockets don’t bother
putting down a fraction of the purchase price. Instead, they pay for the entire property with an all-cash offer. Some 30 percent of all homes purchased in 2021 were paid for entirely with cash, according to an analysis done by
Redfin. Debunking the 20 percent down payment mythYou may have heard that 20 percent is the required minimum, but that’s not the case. Twenty percent is simply how much you need in order to avoid having to pay extra for mortgage insurance. The insurance is to protect the lender — since you’re borrowing more money with less down, you pose a bigger risk. The reality is that as home prices continue to rise, many homebuyers can’t afford to put down 20 percent. In fact, 49 percent of all buyers put down less than 20 percent, according to the most recent data from the National Association of Realtors. If so many are buying homes with smaller down payments, where did the 20
percent down payment myth come from? It’s most likely based on Fannie Mae and Freddie Mac guidelines. To qualify for a guarantee from either of these entities, a borrower needs to either put 20 percent down or pay mortgage insurance. Is it worth putting down 20 percent?So, you don’t have to put down 20 percent, but should you? That answer depends on a number of factors, but the most important is your own bank account. If you are sitting on plenty of cash and putting down 20 percent won’t stress your finances, it’s a good move to avoid costly mortgage insurance payments. However, if a 20 percent down payment will drain most of your bank account, you’ll want to think twice. Homeownership comes with loads of other expenses, and you need to be prepared for potential emergencies, too. If that means paying mortgage insurance for a while, that’s okay. Consider some of the pros and cons about hitting the 20 percent threshold: Down payment less than 20 percentPros
Cons
Down payment 20 percent or morePros
Cons
What does a 20 percent down payment look like?If you’re trying to determine what a 20 percent down payment will mean for your finances, the answer depends on where you’re looking to buy. Home values vary across the country, which means that saving up 20 percent of the purchase price in one city will be a lot easier (or harder) than in another area of the country. Consider the differences among these three markets, based on the median price of homes sold in August 2022: Boston, MA
Dayton, OH
Seattle, WA
How much should you put down on a house?As you think about how much to put down on your house, consider these key factors before settling on an amount:
It’s important to understand how much the down payment for a house will impact your payments. Consider a $300,000 home and a 30-year fixed mortgage with a 3.2 percent interest rate with different down payments:
The monthly mortgage payment above doesn’t include homeowners insurance, property taxes, and, for the 5 percent down payment scenario, mortgage insurance. That cost will vary, but consider an estimate from Freddie Mac that pegs monthly premiums for the above loan at $274. Making a 20 percent down payment means you won’t have to pay this added cost. There’s another way to look at things, though. The premiums you have to pay on private mortgage insurance for a conventional loan are canceled once you build 80 percent equity in the property. So, dealing with that extra cost temporarily can mean the difference between continuing to rent and buying your own place. Paying an extra fee is never fun, but it helps get you in a home of your own much faster. Another important consideration: A higher down payment can get you a lower interest rate, further saving you money each month. We didn’t account for that in the example here, but it’s one more reason why a larger down payment can be beneficial. You can use
Bankrate’s down payment calculator to understand how different amounts will impact your bottom line. If you can afford a bigger down payment, remember not to stretch yourself too thin. You want to be
able to enjoy living in that new house without depleting your entire savings and stressing about your finances. How to save for a down paymentRegardless of what percentage you’re aiming to hit – 3 percent of the purchase price or 20 percent – you’ll need to put a plan in place to set aside that money. Here are some tips to focus on building up your down payment funds:
Down payment FAQsStill searching for the right answers to decide how much to save for a down payment? These frequently asked questions can point you in the right direction. Bottom lineDon’t let the 20 percent down payment myth prevent you from becoming a homeowner. Although some loans may charge higher interest rates if you put down less than 20 percent, and you may need to pay mortgage insurance, that extra cost can be worth it to get you on your way to building equity in your own home. |