When you take out a loan to make a major purchase, most lenders require you to put down a percentage of the price in cash. This is known as your “down payment.” It signals that you’re a trustworthy borrower, since you worked to save up money before getting the loan to finance the rest. As a result, a significant down payment can give you better terms, including a lower interest rate.
Choosing how much to put down when you buy a home is a major decision. It can affect everything from your mortgage rate to your insurance and monthly payment amount. Here is some helpful advice on picking the right down payment for you — and home ownership options when you can’t afford one.
Big or Small?
Your mortgage down payment can range anywhere from a minimum of 5% of the purchase price up to 25%. Why pay more? First, the more you pay, the less you have to borrow. That can mean a monthly payment that’s hundreds of dollars lower. When you’re borrowing more, you also pay more in interest (and that doesn’t even take into account that lenders often charge higher interest rates to borrowers with smaller down payments). And if you put down less than 20%, you’ll often have to pay private mortgage insurance (PMI), which makes that monthly payment even more expensive. If you can pay more up front, you’ll likely pay less every month.
Not everybody has enough saved up to make a large down payment. Instead, some choose to pay more than the minimum monthly payment, reducing the principal at a faster rate. Once you pay off 20% of the purchase price, you can apply to remove PMI entirely.
Down Payment Alternatives
You may be surprised to learn that some mortgages don’t require a big down payment — or any down payment at all. That’s because these mortgages are backed by a powerful ally: the United States government. Lenders are much more likely to take a risk on a borrower if they know that the loan is backstopped by the government.
Veterans Affairs (VA) loans start with 0% down, very low interest rates, and no PMI either. Service members, veterans, and surviving spouses all qualify to apply for these mortgages when they buy a home.
If you’re buying in a rural area, the U.S. Department of Agriculture (USDA) also offers 0% down mortgages, with low interest rates and no PMI. Just keep in mind that you have to meet certain requirements, including a good credit score and a monthly payment that is less than 30% of your monthly income.
To make home ownership accessible to as many people as possible, the Federal Housing Administration (FHA) also stepped in to back mortgages. As long as you have a credit score of 580 or higher, you can get an FHA loan with a down payment as low as 3.5% of the purchase price. You’ll still have to pay mortgage insurance, but you’ll be able to own your own home with much less money down.
If you have questions about your down payment or any other aspect of buying a home, the mortgage experts at Equity Bank are here for you. Contact us today, and we’ll work with you to set up a mortgage that fits your needs and what you can afford. Your home ownership dream is just a call away!