When you start your home-buying research you will quickly come across discussions on the ideal amount for a downpayment. There are a few things to consider when thinking about and strategising your downpayment price or percentage.
However, there are a few key things you need to consider:
How much do I need to put a downpayment on a house?
It is recommended to have a 10%-20% downpayment for a home. The exact percentage and amount can vary depending on a few factors including the lender and the type of loan chosen. However, the recommended amount across the board is 20% of the cost of the house, for a few reasons:
Better Interest Rates
The interest rate is another cost you have to factor into your mortgage payments. This is the percentage of the total amount of the loan and it is the amount you are charged, for borrowing the money. This cost is applied to your monthly mortgage payments.
There are a few factors that are considered when it comes to interest rates such as the state of the market, the debt-to-income ratio of the buyer and the amount paid for the down payment.
When your down payment is high, this is viewed as less of a risk to lenders. This means that lenders often give higher rates to what they deem as high-risk applicants. Paying 20% to your downpayment, therefore, can result in a lower interest rate and thus, lower payments over the course of your loan.
Lower Monthly Payments
With a larger down payment, you will automatically have less money to pay for the duration of your loan. This is due to the fact that you will borrow less money which results in lower monthly mortgage payments.
It Increases your competitive edge over other buyers Home sellers always prefer a buyer who can pay 20% of their downpayment upfront. This indicates to them that your finances are in order and that you will get a loan from a lender and in many cases, in less time. This is beneficial when you are in a competitive market and the seller wants a smooth and quick buy-over process. It helps you avoid private mortgage insurance
When you pay a 20% downpayment you will avoid private mortgage insurance.
Also, known as PMI, this is another charge that is included in monthly mortgage payments. It is often required for borrowers who have a downpayment that is less than 20%. Since these borrowers are seen as “high risk” for the lender this insurance is meant to protect them from any “greater risks” that could arise for the duration of the mortgage.
This payment will increase your overall mortgage and monthly payments and with any new home purchase, you will want to find ways to reduce any additional monthly expenses.
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