Is a 20% down payment right for you?
Guest Post By Trulia’s own: Katie Basset
The mantra repeatedly used when you are thinking about buying a home: You need a 20% down payment. The magical industry gods carefully drafted this percentage and it’s what most home buyers go by, right? However, given today’s economy and overall industry, 20% might not be your best option. Understanding how down payments might affect the overall cost of owning a home is essential when deciding if a 20 % down payment is right for you.
What is a down payment?
A down payment is the amount of money you will spend up front when purchasing your house and it is one of the biggest roadblocks for most homebuyers. Curating a large down payment can be tough and formidable. But there’s good news – different options are available!
The ideal down payment amount will be different for prospective home owners, contingent on their economic situation. For example, a homeowner with a large amount of money saved with a lower income might look at a larger down payment because this would reduce their monthly home payments. On the other hand, a potential homeowner with a high household income and smaller savings might opt for a low- or no- down payment loan option.
Reasons to consider a down payment lower than 20%
So where do you fall? First, you need to find out if the benefits of paying less align with your situation. Below are a few reasons people choose to spend less than 20 % on a down payment:
- Savings are minimal
- While you may be able to pay the monthly mortgage costs, not every homeowner has a large sum of money set aside exclusively for a down payment. In these scenarios, opting for a down payment less than 20% could be worth it
- You don’t see this home in your long-term future
- Buying a home and thinking short term can be risky, and applying a 20 % down payment could drain your savings account.
- You have access to zero down payment programs
- You may be able to access lower down payment programs if you are a retired service member or if you are looking to live in a rural area. Therefore, it’s beneficial to research and apply for different programs and categories.
Downsides of a Lower Down Payment
A homeowner should also assess the disadvantages to a lower down payment to determine how it could affect their status. Below are some drawbacks:
- You are likely limiting your mortgage eligibility
- You could be looking at mortgage insurance premiums
- Interest rates and closing rates will be higher
How Should You Decide?
To determine the optimal down payment amount for you, consider these following questions:
- What is your credit score?
- Do you have access to payment programs (i.e. The Department of Veterans Affairs)?
- How much do you have saved?
- How much are you currently making?
- What are the cost differences when you play around with the down payment amount, when it comes to monthly mortgage rates, closing costs, etc.?
- How long will you see yourself in this home?
The bottom line: make sure to explore your options and select a down payment that best fits your economic situation and long-term goals when it comes to owning a home. A homeowner now has different options that shouldn’t be overshadowed by the conventional loan the industry is saturated with.