Buying a home is a significant milestone in many people’s lives since it is such a commitment. There are many steps to buying a house, and the process is long and grueling.
To purchase a home, you will likely need a mortgage. However, before you can secure a mortgage, you’re going to have to save up for a down payment. Down payments can vary greatly, and there’s so much confusion swirling around them. Many factors influence down payment, and each scenario is different. So, what size down payment is best for purchasing a house in your situation?
Type of Mortgage
The type of mortgage you are applying for has a major influence on what size of down payment you should use. Different mortgages have different minimum amounts that you can use for a down payment, something that you need to consider. Also, you need to contemplate the interest rates for your mortgage. Different mortgages will have varying rates, and this will have a significant effect on what your down payment will look like. Before you even think about making a down payment, ensure that you know the exact type of mortgage you’re looking at and all of the details involved.
One big factor that goes into how much you should pay for your down payment is your credit score. Your credit score tells your financial history and lets lenders know just how effective you are at paying off your bills.
A good credit score will allow you to get better rates on your mortgage, meaning that you won’t have such a crippling mortgage. You also won’t have to put down a massive down payment to show financial stability, as your credit report will do that for you. However, if you have a poor credit score, then you likely will have to commit to a larger down payment. This will show that you are financially stable and could convince a lender to give you better rates. If it doesn’t, then at least you’ll be saving lots in interest by making a sizeable down payment.
Current and Future Income
Another major factor that you need to consider when determining the size of your down payment is your current and future income. Do you have enough income right now to save substantial amounts for a down payment? Will you have enough income in the future to handle large mortgage payments?
If you expect massive income decreases in your future, then it may be smart to pay for the bulk of your house now while your income is steady and strong. However, if you feel like your income will stay the same or increase, then you don’t necessarily have to commit to a large down payment. Planning your down payment size around your ability to generate income is a smart idea that could save you a few financial headaches down the road.
One thing that you can do is give the minimum down payment for a home. Different types of mortgages have different minimum down payments, meaning your minimum amount might vary. However, your minimum payment will usually fall somewhere between the range of 3 to 10 percent of the overall price of your house.
Paying the minimum down payment can be a great strategy if you’re not currently in a position where you can save a lot of money. This is especially smart if you feel that you’ll be getting a pay increase in the next 5 to 10 years. Yes, paying the minimum down payment means that you have to have a bigger mortgage and thus are paying more in interest. However, if you can’t save at the moment and won’t mind making bigger mortgage payments down the road, then this could be the best option for you.
20 Percent Payments
You are not pigeonholed into making the minimum down payment on your house. Many people pay much more than the minimum amount. One of the most common methods of payment is the 20% strategy. This strategy involves paying 20% of the entire house’s cost as a down payment and paying the last 80% with a mortgage. This can be beneficial for many reasons. First, it means that your mortgage is smaller, meaning that less interest will accrue over time, and you will save money in the long run.
Also, a sizeable down payment can get you an excellent mortgage rate, saving you even more money. If you want to save the most money, then a large down payment is your best option. However, you have to save for an extended period, and saving a large amount of money can cause a lot of issues if you’re not financially stable. Analyze your situation and determine which down payment works the best for you and your lifestyle.