How Much Down Payment When Buying a New Home

It is no secret that buying a house requires a lot of planning. From choosing the perfect location for your house to securing an affordable plan for house loan, homebuyers have to go through a lot of steps before getting the keys to their dream house.

Buying a house with a mortgage is very common across the US. This step usually starts with making a down payment which leads to an important question: what is the ideal down payment amount? The good news is that you can pay as little as 3% of the property price as down payment currently. What’s the catch, you may ask? In this article, we’ll explore which down payment option is best suited for you.

What Is a Down Payment?

The down payment is an amount you pay upfront to purchase a house. You get equity or ownership stake in the property against this amount, which is deducted from the total principle amount of your mortgage.

The Standard Down Payment

Real estate experts will commonly advise you to pay at least 20% of the cost of the property. This means that if you are looking to buy a house worth $400,000, you would pay at least $80,000 upfront to get a home loan. For salaried people, saving such a large amount of money seems like an impossible task.

However, a recent report by the National Association of Realtors (NAR) suggests that you don’t necessarily need to pay between 10 and 20% as a downpayment. Sixty percent of homeowners are financing their property by paying 6% or less as a downpayment. This means that for a property worth $400,000, you can get a loan after paying a much smaller amount of $24,000.

Low Down Payment Alternatives

As discussed above, you can buy a house by paying as little as 3% of the actual price of the house as a down payment, paying only $12,000 to get the loan. However, when you pay a small down payment, the lender may charge a high interest rate and your monthly payment will be higher.

To mitigate this risk, you could consider getting private mortgage insurance (PMI) and pay a monthly payment of it as well in addition to the mortgage payments. The loan programs that don’t require mortgage insurance will ask for a funding or guarantee fee. Also, since you are a high-risk client, the lender will charge higher interest rates for the loan provided.

Benefits of the Standard Down Payment

Even though paying 20% of the property price is not mandatory, this so-called standard amount does come with plenty of advantages. If you make a 20% down payment, you are likely to get the following benefits:

• Lower upfront fees
• More instant equity in your home
• A lower monthly payment
• Lower ongoing fee