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Home Buying

What Is a Down Payment and How Much Do You Need?

8 Minute Read

Every homebuyer wants to see the day when they make their last mortgage payment, when they feel the weight of the loan lifted, when they can finally declare with confidence this home is officially mine.

If this is your goal, keep going. But to get there quicker, you need a big head start—a big down payment.

So what is a down payment and how much do you need? Everyone has a different idea on this, so let’s get to the bottom of which one is best.

What is a Down Payment?

A down payment is the cash you pay upfront to buy a house. It’s your stake in the ground, your first leap into homeownership, and your chance to trim how much you have to borrow from a lender.

A down payment is the cash you pay upfront to buy a house. It’s your stake in the ground, your first leap into homeownership, and your chance to trim how much you have to borrow from a lender.

For example, let’s say you want to buy a $225,000 house. If you only save $6,750 for this house, that’s a 3% down payment—pretty flimsy, considering you’d have to borrow $218,250. But if you were super intense and saved at least $45,000, you’d have a 20% down payment. You’d only have to borrow $180,000.

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It’s simple really. The more you borrow, the more mortgage debt you’ll have.

What’s the Minimum Required Down Payment?

For most mortgages, the minimum required down payment is 3%. That may sound tempting on the front end, but don’t be fooled. That’s actually a very weak down payment, not to mention a sure-fire way to wind up upside down on a home. And you’ll waste a lot of money in interest over the life of your mortgage.

If your ultimate goal is debt-free homeownership, shoot for a 20% down payment—around $40,000, depending on the size and price of the home you want. If you haven’t saved 20% after two to three years of intense saving, lower your goal to 15% or 10%. But don’t go any lower than 10%. It’s not worth it!

Whatever you do, don’t even think about settling for government-backed mortgage traps, also known as FHA and VA loans. At first glance, these loans may look attractive—you can put down next to nothing—but they come with higher interest rates and mortgage insurance payments.

Are "No Down Payments" a Good Deal?

As you begin saving (or continue chugging along) for your down payment, you may be tempted somewhere along the way by "creative financing" options that let you put nothing down to buy a house.

Sure, buying a home with no money down sounds like the deal of the century. But if you buy a home without a down payment, you’re digging yourself a deep, deep debt hole. You’re not buying a house: You’re buying a debt dungeon and locking yourself in.

Here’s the bottom line: If you can’t save anything for a house, you can’t afford one. Period. Putting nothing down is a stupid way to finance the biggest purchase you’ll ever make.

Should You Use Your Emergency Fund as a Down Payment?

Now, this is an easy one. Is buying a house really an emergency?

No!

Buying a house is a planned expense, folks, so keep your down payment separate from your emergency fund. Trust us, you’ll need it later for unexpected repairs and routine maintenance of your house.

Before you even start saving for a down payment, get completely out of debt and save an emergency fund to cover six months of expenses. In other words, don’t put any money towards your down payment until you’ve finished Baby Steps 1 – 3.

How Does the Size of your Down Payment Impact Your Mortgage?

Simply put, the amount of cash you put down in the beginning affects how much you pay for your house. The rule of thumb for down payments is this: A smaller down payment means you spend more on your home; a bigger down payment means you spend less.

Why is this true? Because the size of your down payment determines three things: the need for private mortgage insurance (also known as PMI), your monthly mortgage payment, and the total cost of interest.

How Does the Size of Your Down Payment Affect PMI?

If your down payment is less than 20%, you have to pay private mortgage insurance (PMI), a type of insurance that protects your lender if you stop making payments on your loan.

You’ll pay PMI every month, like an insurance premium, until you’ve paid 20% of your home’s value. PMI can cost anywhere from .5% to 1% of the entire loan. That means if you have a 5% down payment on a $225,000 home, you’ll pay at least $89 a month for PMI. That’s $1,068 for the first year!

Yep, that’s a lot of money to spend for insurance. And the worst part? You can kiss that money goodbye. It has no return, no investment, and only after you’ve paid 20% of your home’s value can you ask your lender if you can stop paying PMI. Even then, there’s no guarantee you’ll be able to because every lender is different.

How Does It Affect Monthly Mortgage Payments??

When you have a larger down payment, you borrow less. And when you borrow less, you typically make smaller monthly mortgage payments, depending on the loan.

Let’s imagine you take out a 15-year conventional mortgage on a $225,000 house. With a 20% down payment, you’ll have to borrow $180,000. That means, every month, you pay $1,578.

Now, what if you put down only 3%? You’ll pay $1,945 a month—an extra $400. That may not seem like a lot now—until you or your spouse lose a job. All of sudden, you could use that extra $400 a month.

How Does It Affect Total Interest Costs?

If you’ve been paying attention, this is a no brainer: The more money you put down in the beginning, the less you pay in interest.

Let’s return to our nice $225,000 home. Let’s assume you have a 4% interest rate on a 15-year mortgage. In one scenario, you’re going to pay $8,356.78 in interest by the end of your first year. In the second, you pay $7,037.29—over a thousand bucks less in interest. Can you guess which scenario involves 5% down versus 20%?

That’s right. With a 20% down payment, you save $1000 bucks in your first year. $1000! If that’s not a big enough wake-up call, go over to our mortgage calculator and see how much you’d save over the life of the loan.

Why You Should Make a Large Down Payment

We get it. Saving for a down payment can be one of the most challenging, frustrating parts of buying a house. But patience and perseverance pay off—big time.

Don’t forget: A lower down payment doesn’t save you money. Factor in higher interest rates and hefty fees that come with this mortgage option, and you end up paying more than your home is worth. And that is never a good idea.

If you’re saving for a down payment and you haven’t reached at least 10%, don’t stop now. Practice a little delayed gratification. Putting down 20% will be well worth the hard work for six important reasons.

  1. You’ll pay off your home faster.
  2. You won’t have to pay PMI.
  3. You’ll likely get a lower interest rate.
  4. You have a better chance at getting a mortgage.
  5. You’ll make smaller monthly payments.
  6. You’ll stand out as a competitive buyer.

After you’ve saved for your down payment, the last thing you want to do is spend it all on a bad investment. That’s why it’s super important to get in touch with a real estate agent who knows your local market and can help you get the most for your cash. Even if you’re still saving for that down payment, contact a real estate agent today.

Ready to Get Smart About Buying a Home?

If you’re thinking about buying a house, contact our friends at Churchill Mortgage. A loan specialist can help you find ways to save more money towards a down payment, as well as put you on the right path for ultimately getting approved for a mortgage.

If you want to work with a loan specialist who’s also a mentor, give Churchill Mortgage a call. Reach out to one of their mortgage experts today.

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Buy a House with an Agent Who Serves, Not Sells.

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Buy a House with an Agent Who Serves, Not Sells.

You need an agent who cares more about you than their commission check.
Find a Buyer's Agent