Buying a Home? Here's What to Know About Down Payment Options
Like buying a car, buying a home requires a down payment if the buyer uses a loan and not cash. Most home buyers are aware that a down payment is 20 percent of the home's total cost, but this isn't necessarily true for all purchases. Down payments can vary depending on many factors, so home buyers should know how to make their down payment work for them. Here is what all home buyers should know about down payments to prepare themselves for closing day.
The Price of Down Payments
Most home buyers think they need to have a 20 percent down payment ready at closing. However, depending on the loan they use, they don't have to have 20 percent. A down payment can be anywhere from three to 20 percent. For example, if a homeowner is buying a home for $200,000, they would ordinarily be expected to have a down payment of $40,000 ready at closing. With certain mortgage options, they can potentially buy that same home with as little as $6,000. That's a huge difference that can make owning a home accessible to a lot more people.
How Different Mortgages Influence Down Payments
The type of home loan a buyer uses can change how they choose to pay for their down payment. For instance, a home buyer who wants a three percent down payment might choose a Federal Housing Administration (FHA) loan.
Other home loans, such as veterans affairs (VA) loans, don't require the home buyer to have a down payment at all. However, these loans are exclusive to veterans and their spouses. On the other hand, United States Department of Agriculture (USDA) loans can be another good choice for general buyers, especially if they want to move to a rural or suburban area.
Large vs. Small Down Payments
Home buyers trying to decide on their down payment are likely wondering about the pros and cons of large and small down payments to help them make the most informed choice possible.
The biggest disadvantage of paying 20 percent down is that it isn't feasible for all buyers. Twenty percent of the home's total price is a lot of money, and the buyer will need to pay for closing costs on top of it, adding another three to five percent.
However, paying a smaller down payment also has its disadvantages. Down payments lower than 20 percent require private mortgage insurance (PMI), an extra fee homeowners will have to add to their monthly mortgage until they have paid off 20 percent. The PMI fee will also change depending on the down payment. The lower the payment, the higher the PMI and vice versa. Reviewing your finances before buying a home will help you decide which option is better for you.
Down payments are a significant part of buying a home, and home buyers need to understand what their down payment means for them before they get to closing day.