When you purchase expensive items and need to take out a loan to do so, such as a car or a house, you’ll usually need to make a down payment to cover a portion of the total price. That payment can be critical when it comes to getting approved for a mortgage and can also affect the cost of borrowing throughout the life of a loan.
If you already own a home and plan to sell it before buying a new home, you may be able to earn enough of a profit to come up with most of all of the down payment. To determine how much your home is worth and how much you might have left after any fees and paying the balance on your current home loan, you can use a property value estimator. But no matter how much you make, knowing the best down payment to put down on a new house can be a big benefit to your overall financial situation.
According to a survey by the National Association of Realtors, between December 2016 and November 2017, the majority of first-time buyers put down zero to six percent on a home, despite the benchmark having long been 20% of a home’s value. That’s the number most mortgage lenders and financial experts typically recommend, yet the data shows most homebuyers don’t put down that much. So what’s truly the best down payment size for a house?
Benefits of a Larger Down Payment
A big down payment, 20% or more, can be beneficial in a number of ways:
Lower interest rates. As mortgage lenders like to see bigger down payments, you’ll likely get a lower interest rate as it reduces the risk to the lender.
No Private Mortgage Insurance. A larger down payment often means you won’t have to pay for private mortgage insurance (PMI), and potentially other fees as well. When taking out an FHA loan, the cost of mortgage insurance is lower with a bigger down payment – and that FHA insurance is usually something you’ll have to pay throughout the life of the loan.
Smaller monthly payment. A larger down payment also means a smaller monthly payment which can make it easier for you to meet your monthly budget while also providing an extra cushion should you experience a job loss or other financial issues.
Benefits of a Smaller Down Payment
You may be able to buy a house sooner. Obviously, when you don’t have to put as much money down, it won’t take as long to save, and for some people, saving up 20 percent to buy a house can take years or even decades.
More resources for upgrades and repairs. By making a smaller down payment you’ll have more cash left to pay for inevitable repairs and upgrades like installing the latest energy-saving appliances or updating the kitchen.
An emergency reserve. If you have a large amount saved and don’t part with all of it on a down payment, you’ll have cash available if your car breaks down or any other kind of emergency that might arise. Having no money left at all can easily lead to a very sticky situation down the road that could potentially cause you to lose your home.