How Much Money You Should Put Down on a House

Buying a home is one of the biggest if not the biggest financial commitments you’ll make in your lifetime which means you probably have many questions about the process, including how much money to put down.

It’s better to put down 20 percent of the sales price if you want the lowest possible interest rate and a lower monthly payment, but if you want to get into a house now and want to begin building equity, it might be better to purchase with a smaller down payment of 5 to 10 percent. A recent report revealed that nearly half of home buyers made a down payment that was at least 20% of the home’s value, which on a $300,000 home is $60,000.

The Down Payment and Closing Costs are Different

Those who’ve never purchased a home before sometimes confuse the down payment and closing costs with the thought that they’re one in the same. The down payment is the percentage of the home’s sales price that you’ll need to pay towards your home loan. One of the reasons banks require a down payment is that it will reduce their risk as homeowners who invest their own money are less likely to default on their mortgages. Closing costs are separate and run 2% to 5% of the sale price. There are both buyers’ and sellers’ closing costs, with a seller closing cost calculator typically calculating the amount of the realtor’s commission fees.

How Much Money Do I Need to Put Down on a Mortgage?

Putting down 20% of the agreed upon sale price of the home has long been the recommendation as it will save you money in interest and also save you from having to pay private mortgage insurance (PMI). As the amount of your mortgage is directly impacted by the amount of your down payment, the higher it is, the more affordable your monthly payments. But it is possible to put down an amount that’s much lower, especially if you have an excellent credit score.

How Much House Can You Afford?

Some people looking for a new house are unsure about how much house they can afford. As a general guideline, a good way to determine what you will be able to pay for without sacrificing too much of your lifestyle is to look for homes that are anywhere between 2 and 2.5 times your annual gross income. For example, if you make $150,000 per year, a house that is between $300,000 and $375,000 is a comfortable budget.

Does Your Down Payment Affect Your Offers?

Houses on the lower end of the price spectrum tend to sell faster, so if you find one that is within your budget and meets all of your needs, it’s smart to put a bid in as soon as possible. Especially in competitive markets, being able to put down a larger down payment will make you appear more prepared and financially capable. It will also make it easier to get approved for a mortgage and obtain a better interest rate.

Down Payment Assistance

In many states, down payment assistance programs are available for first-time buyers, but many of these are based on a first-come-first-serve need and can only help a limited number of people. Still, it may be possible to find a program you can take advantage of so it’s worth looking into.