So you’re finally taking that step — moving out of the rental world and moving into your own home. Whether it’s your first house or your first home purchase in a long time, you might have mixed feelings about entering the housing market. Sifting through details like the mortgage, taxes and paperwork can be complicated and tiring — and you might not even know where to begin. When you’re buying a new house, the first detail you need to think about is the down payment — and how much you’ll need to save.
From understanding how down payments work to knowing how much money is appropriate to put down, here’s everything you need to know about the down payment on your new house.
What Is a Down Payment?
As the amount of money you put down toward the purchase of your new home, a down payment solidifies the sale, shows the home seller and mortgage lender you’re invested in the sale and demonstrates your commitment to repaying the rest of its value. Your down payment comes out of the total price of the home and is referred to by its percentage of the sale. For example, if your new home has a value of $250,000 and you invest a down payment of $25,000, you’ve made a 10 percent down payment on the total home purchase.
Your down payment does more than complete the sale — it also reduces the total amount you’ll be repaying with your mortgage and lowers the interest rate on your home loan. The more you invest in your down payment, therefore, the less you’ll pay on the total price of your new home over time.
Down Payment Percentages
When it comes to the percentage you plan to put down on your new home, no technical standard rate is required — unless the home seller specifically requests one. While 20 percent is a fair down payment and might be what you expect to pay on your new home, it’s on the high end of the spectrum. Many homeowners can obtain a home loan from the U.S. Federal Housing Administration (FHA) for as low as 3.5 percent down on a fixed-rate mortgage of 30 years, and even those borrowing from a bank can put down as little as 5 percent.
While paying a higher down payment at the time of sale will have its benefits — such as a lower interest rate and paying less for the home itself over time — you don’t have to commit to an unreasonable percentage. The average American typically pays neither the minimum down payment of 3.5 percent nor a percentage as high as 20 but usually commits to a down payment of roughly 11 percent of the total home sale.
How Much Should You Save for a Down Payment?
The down payment percentage that’s right for you depends on a variety of personal factors — such as the total cost of the home, your financial status and credit score, and the length of your mortgage. Work with the home seller and your mortgage provider to decide how much you should save for your down payment, and make sure to calculate your corresponding monthly mortgage payment before making your decision.