If you are a first time home buyer, you are probably wondering about the infamous 20% down payment. Do you really have to put down 20% of the total? What happens if you pay less? In this blog, we’ll go over the basics of down payments and the benefits and downsides to whatever payment option you choose in order to help you best decide how to purchase your new home.
What is a Down Payment?
Most people don’t pay cash for the entire cost of a home. They pay a percentage of the total, which is typically 20%. That cash amount you pay is considered your down payment. But what if you don’t have the cash saved up to pay 20% of a home? Do you have to wait until you can afford it? While a 20% down payment is suggested, it isn’t actually required. You can pay from a zero down payment to any percentage you wish to pay. Just keep in mind that whatever you don’t pay in the down payment just turns into a loan you have to pay. So the main question is, how much money do you want to owe?
Choosing a Zero Down Payment
Oftentimes, those who are looking to buy their first home aren’t prepared to put down 20% of a home’s cost in cash. Unlike what many are led to believe, that the 20% down payment is the only way to go, you can choose to put down whatever amount you can afford. You can even choose a zero percent down payment. But whatever you don’t pay up front, you end up having to borrow and pay interest on. The less you pay upfront, the higher the mortgage cost will be monthly. Also consider, if you choose to not pay the 20% down payment, you will have to pay a private mortgage insurance (PMI) to your bank to ensure that money gets paid eventually.
Choosing the 20% Home Down Payment
However, if you do choose to put money down on your home, you will owe less on your mortgage payment each month. The bigger the down payment you pay, the less loan amount you will have and therefore a lower monthly payment. While your monthly payments will be lower, it can be risky to put down a large down payment. A high down payment can potentially lower your rate of return and puts you at risk of losing money if your home’s value drops due to the economy. So if you do choose to put down a down payment, don’t pay over 20%.
Weigh Your Options
With whatever down payment option you choose, there will be risks involved with an investment as big as a home. Since your home is both a shelter and an investment, make sure you put plenty of thought into how you choose to pay for it. Before you make any decisions, sit down with someone who can show you all the costs and options to see what works best for your budget and situation.