A Guide to Down Payments

Saving for a down payment is a significant first step towards securing a home loan. If you’ve never purchased a home or financed a larger cost item, like a car, you might be curious about how down payments work.

A down payment is a lump sum of money you pay towards a big purchase.

With a home purchase, the down payment is deducted directly from the sales price. That means the down payment will lower the amount you need to borrow from a lender. Your down payment amount tells your lender you’re serious. Overall, it can give your lender confidence you’ll likely make your mortgage payments.

As far as timing, your down payment is typically paid during closing. Some sellers will require earnest money. Earnest money is used to reserve the home through a sales contract. This money can be later applied to your down payment or closing costs. Understanding where the down payment falls in the home loan timeline makes it easier to determine how long and how much you need to save.

As soon as you know you want to buy a home, it’s best to start saving for a down payment. Once you have a price range for your home purchase in mind, you can make a goal for the amount of the down payment you will likely need.

Saving a big amount of funds can take time and dedication – so you need to have practical expectations for how quickly that can happen based on your financial situation.

Next, you’ll need to know how much of a down payment you should aim for.

The amount of your down payment will depend primarily on 3 things:

1. The price of the home you want to purchase;
2. The requirements of the loan program you are applying for; and
3. Your specific financial situation.

Examples of possible requirements:

• Down payment requirements vary in range depending on a number of factors. The median down payment in 2020 was 7 percent of the purchase price for first-time homebuyers and 16 percent for repeat buyers.
• For many conventional loans, lenders may require Private Mortgage Insurance (PMI) if buyers are unable to provide at least 20 percent for a down payment. PMI works as mortgage insurance for the lender. For the buyer, however, it usually means a premium added to your mortgage payment.

How much should you pay?

• Some sources may encourage you to pay as much as you can for a down payment (within your financial means) in an effort to lower your monthly payments. This can also minimize the interest you’ll pay during the life of the loan.
• Other sources may suggest paying the minimum required down payment in order to have a bit of a financial buffer for fees/closing costs, maintenance to your home, or for monthly payments.
• It’s best to assess your financial situation (and possibly consult a financial advisor) to determine whether more money saved on interest or more financial flexibility for expenses (expected or unexpected) is a higher priority for you.

A mortgage calculator is a great way to see firsthand how the amount of your down payment can directly impact the other parts of your home loan, specifically, your mortgage payment. You’ll see how your down payment directly affects your payment and interest. It can also help you predict the final cost of the total payoff for your mortgage.

To begin, try plugging in the max cost of a home you’d be willing to buy and an estimated down payment. The more accurate the numbers used, the more accurate the figures from the mortgage calculator. However, you can see a ballpark monthly payment even if you are using estimates. A mortgage calculator can also let you see how each mortgage loan variable impacts the others, and you can adjust the calculator until you find numbers that work for you financially.

We hope that you’re now better prepared to start prepping for your down payment. You have tools to help you save up, and you can even adjust your budget to prepare for your payment. Now you can search for homes with confidence and intention once you’re ready. A well-informed homebuyer makes for a happy homeowner.

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