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Saving up for your first house can be arduous and confusing, even to the most financial-savvy home buyer. Conventional wisdom tells us that you’ll need at least 20% of the purchase price for a down payment, and after adding closing costs, taxes, fees, and any necessary repairs, the bar to ownership can often seem too high to clear. Today, we’ll give you all of the details on home down payments and tips to start saving for one of your own. You may be surprised to learn how attainable homeownership can be!
What is a Down Payment?
A down payment is simply a portion of the home’s purchase price you’re paying for upfront. Whatever amount you put down is subtracted from the home’s purchase price, and your mortgage balance will be for the remainder. Down payments are typically due on the closing day of the sale.
How Much Should I Put Down?
Most homebuyers aim for 20% of the purchase price when planning their down payment. If you’re looking at a $300,000 house, you would need $60,000 ready to put down. That’s a significant amount of money and can make owning a home seem unattainable. Despite the 20% trope, you can get the home of your dreams for as little as 3% down. FHA and other loan types offer lower down payments, but you’ll incur higher monthly payments and must purchase private mortgage insurance. At 3%, that $300,000 home could cost just $3,000 down.
What is Private Mortgage Insurance?
Private mortgage insurance, or PMI, provides some protection to lenders in the event of a default. Making a down payment of at least 20% will prevent you from paying for mortgage insurance and is one of the best ways to lower your monthly obligations. PMI will be added to your monthly bill by your lender, and you won’t recover these payments at any point during the life of your loan. You can expect to pay anywhere between 0.25% to 2% of your loan balance each month in insurance payments, but rates vary widely by lender.
Tips to Save
We’ve compiled some quick tips to help make your real estate dreams a reality. Using these tips will get you started on the right path, and by making a smaller down payment, you could get your foot in the door even faster!
- Make a Goal
Setting goals is a must to help guide your financial journey. Decide what’s important to you, and make goals accordingly. If you want a home sooner rather than later and aren’t as concerned about monthly payments, set a lower percentage down payment goal. If PMI is something you’re trying to avoid, try saving longer and getting your savings over the 20% threshold.
- Adjust Your Budget
Saving for a down payment makes for many sacrifices and tough decisions. If you’d like to save a 20% down payment in five years, you’ll need to store away thousands of dollars a year. Take a look at your expenses and find places where cuts can happen to help build your savings. It all adds up, so any savings you can find will help.
- Focus on the End Game
Staying laser-focused on your goals will help you achieve them sooner. Use technology to help you save automatically – scheduled deposits and apps that round up your purchases for savings can help you stack cash without even trying. If you receive a work bonus or other unexpected funds, stash it away for your down payment fund. Before you know it, you’ll be ready to buy!
Consider what you can afford each month, start saving, and you’ll be in your own place in no time!
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