The down payment for a house is the biggest obstacle facing most home buyers. More money down could mean you get the loan you want, or it could give the seller more confidence that the deal will go smoothly. Of course, more money down means you’ll pay less in the long run. But how much should you save for that down payment?
The 20 Percent
You may hear 20% as a “good” amount to put down. Some loans require that you put at least 20% down, although there are loans out there that require as low at 3% down.
So why pay 20%? First, you’ll earn a better mortgage interest rate. A mortgage interest rate is the amount of interest you will be paying on the mortgage. This usually ranges between 3.8% and 4.14%, but it can be higher. Research a lot of lenders before choosing one for your loan; it will help you get a lower interest rate.
The higher the percentage you pay in down payment, the lower your upfront and ongoing fees will be. This is because you are a bigger risk in the eye of the lender. Putting 20% down means you will not have to pay for primary mortgage insurance, either, which also saves you money.
Of course, many people cannot afford to pay a 20% down payment on their home. Some loan options require a lower percentage. For example, an FHA loan is a loan insured by the Federal Housing Administration; these loans only require a 3.5% down payment. If you do use this type of loan, you will end up paying for primary mortgage insurance. This type of loan also requires a lower credit score than other loans; the FHA will approve buyers with a credit score higher than a 500. The FHA is an insurer, and not a lender, so you will still need to go through an FHA-approved lender to receive your loan.
Whether you decide to put the 20% down for a conventional loan or pay a lower percentage down payment with the FHA-insured loan depends on what works best for you. Both have pros and cons, but both ways will get you closer to owning a home.