Are you looking to purchase a house? A down payment is something you will need to do save money for a house .
What is a down payment?
Let's begin with the basics. When you buy a house, a down payment is cash that you pay. Although you can borrow money from the bank to pay a mortgage or home loan, a significant portion of the cost must be paid by you.
Here's how: Your lender uses the down payment as insurance. You are officially invested when you transfer money from your personal account. Your chances of paying your mortgage on time are higher. People like you are a great asset to banks.
You can prove your worth to a lender by saving for a down payment. A large down payment can reduce your monthly house payments and allow you to choose a shorter term mortgage so that you can get rid of this debt sooner than you thought possible.
What amount should I save for a down payment?
We don't like the idea of having to pay debt. Because student loans, car loans, and credit card debt can eat away at our income, making it difficult to save money for the things that we truly want.
How much should you save? This is the million-dollar question. But don't worry. To buy a home, you don't need to spend a lot of money. To get to your magic numbers, however, you will need to go through the steps below.
In our example, we'll use a fictional family--the Clarks.
- Calculate how much money you can afford each monthly.
Your mortgage payment should not exceed 25% of your monthly take home pay. You can't afford to be unprepared for emergencies and miss out on opportunities if you spend too much on your monthly mortgage payment. We believe that 25% is the ideal amount. This is the sweet spot.
The Clarks earn $1,050 per month by taking 25% of their take-home monthly pay. This number must include taxes, insurance, escrow and homeowner association fees.
Perform the math: Calculate how much money you and your spouse (if applicable) bring home each monthly. To calculate your monthly mortgage payment, multiply this number by.25.
- To calculate your total mortgage amount, use your monthly mortgage payment.
Let's have a little fun with our Calculator for mortgages to find out which price range Clarks should stay with, click here
We recommend a 15 year fixed rate mortgage. This will save you thousands of dollars over a traditional 30-year option.
The Clarks have $1.050 available to pay their monthly mortgage payment. We can use the mortgage calculator to determine if they are able to purchase a $145,000 house with a 20% down payment, $130,000 homes with a 15% down payment, or $125,000 homes with a 10% down payment.
Use our mortgage calculator to do the math. Enter different numbers in the down payment and home value sections to reach your monthly payment. Take note of all options and discuss them with your spouse or a trusted friend.
- For your down payment, aim for 10% to 20%
If you don't know what percentage works best for you and your family, it is time to decide. You should aim to deposit 20%. This will lower your interest rate, allow you to get a 15-year mortgage, as well as help you avoid paying private mortgage insurance (PMI).
Let's say the Clarks make a down payment of 20% on a home worth $145,000. They will need $29,000 to make a down payment.
Perform the math: Divide the total mortgage amount by your plan to use the money for the purchase of a house. You now have your savings goal. You can now circle it and put it on your fridge.
How can I save for a down payment?
Did you know that we admitted that lenders weren't always our best friend?
Not only do banks expect a down payment, but they also require it. Banks also ask you to pay for additional fees that may seem hidden if they aren't disclosed in advance. Let's get to those fees now, shall we?
Private Mortgage Insurance (PMI).
PMI stands for Private Mortgage Insurance. This is an additional fee that you pay to your monthly mortgage payment when you make a smaller down payment than 20%. You can count on PMI upping your monthly payment by about $50 for every $100,000 you spend on a home.1
Appraisal and Inspection Fees
Your future home must be appraised and inspected before your lender will sign off on your mortgage. These inspections can run you about $300 each.
Closing costs
It takes a lot of effort to sign the dotted line. And unless the seller agrees to pick up the tab, you'll be responsible for fees between 2% and 5% of the total mortgage value.
The Clarks are already saving $29,000 to pay 15% down on their house. Now that they know all about the hidden fees involved in buying a house, they will need to save a little more. More math is needed!
- The Clarks buy a $145,000 house with $21,750 down.
- Their mortgage amount is $116,000.
- The cost of the PMI coverage at closing for the first month is $65.
- A $600 appraisal and inspection is required.
- Closer costs fees can be as high as $5,800.
- Clarks should also save $6,465.
If the Clarks are lucky enough to get the seller to pay closing costs, they will have a lot of money that they can put to good use.
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