Owning a home is one of the coveted achievements for most Americans. With the increasing homelessness and high cost of renting, owning a house is the only ticket to a life of freedom and security. However, the whole process of buying a home is muddled with vague information that intimidates first-time home buyers. One of
Owning a home is one of the coveted achievements for most Americans. With the increasing homelessness and high cost of renting, owning a house is the only ticket to a life of freedom and security. However, the whole process of buying a home is muddled with vague information that intimidates first-time home buyers. One of those pressing issues is the question of how much down payment you need to purchase a house.
The fear is justified and legitimate, considering most millennials – who constitute the majority of buyers – are stuck with massive student debt and gazillion loans. However, with proper planning, even these categories of people have a chance of owning a home instead of being life-long renters.
There are several benefits to buying a house. The most obvious being the peace of mind that comes along with having your place and not living at the mercy of your landlord. Let’s admit; the lives of the majority of people in the major cities in the world hang on the thread as the prospect of being evicted – due to late payment of rental – is always eminent.
What is a down payment?
The down payment is the money you need upfront before you make a purchase. A down payment is usually calculated in terms of the percentage of the total price. For instance, if you wanted to buy a house costing $300,000, then a 10 percent down payment would be $ 30,000.
For most home buyers, down payment is one of the biggest amounts of money they pay upfront. This amount is crucial because it shows your commitment toward the purchase of the house and, on the other hand, gives you an initial stake in the ownership of your home.
When it comes to home sales, most buyers and lenders require a minimum threshold of down payment. However, this varies from one to the other. One of the fundamental rules of real estate and mortgages is that the more money you put as down payment during the closing, the less money you pay in terms of interest.
So how do you accumulate down payment?
If you are a first-time homeowner who wants to buy houses in Los Angeles, you might be wondering how you can raise the initial payment, right? Well, there are different ways you can save, for instance, saving with an automated plan, slashing your spending, getting multiple sources of income, and paying off high-interest debts.
How much down payment do you need?
There is no particular amount of down payment that you should pay to buy a house. The amount you pay is entirely a personal decision, and depends on your financial position plus the loan program you intend to use. Put it another way; the minimum down payment depends on the lender, finances, and the type of mortgage you take.
It is advisable to have at least 20% of the price of the house as a down payment. This means that if the house is costing $500,000, it is prudent to have $100,000 as a down payment. However, you should remember that the 20% down payment is arbitrary and not cast in stone. If you are a first-time homebuyer, you shouldn’t be repelled by this because you can access numerous lenders and mortgages, which can push your down payment to even below 5%.
While there is flexibility on the amount of down payment you can pay, the lower the down payment, the higher the amount of interest you will pay. The reason lenders charge for the high interest when you pay low down payment is because the lenders want to cushion themselves against the risk of failing to finish the payment. On the other hand, a higher amount of down payment paints a good picture that the buyer is committed and, therefore, increases the confidence on the part on the lender that you will finish the payment of the mortgage.
While most real estate experts recommend a 20% down payment, the economy has changed, thus making it difficult for most first-time buyers to raise such money. Therefore, the old requirement is no longer practical, and consequently, you can buy houses in most American states, for instance, a house in Los Angeles with as low as a 3% down payment.
Multiple studies indicate that the average amount of down payment has reduced over the years due to the changing real estate market in the USA. For instance, according to a study by the National Association of Realtors, the average down payment was found to be 12 percent. In 2017, a report by Attom indicated that the average down payment was 7.6. This data is necessary because it shows the first-time buyers that they can be able to buy a house with an even lower down payment.
The prices of houses are ever-increasing, making it harder for the first-time owner to save the suggested 20% down payment. As a result, the average of the down payment has reduced to 10% of the house price. According to data by NAR, most first-time buyers pay below 5% when buying their homes.
Thus, if you are dreaming of owning a home, then down payment should not be a hindrance. You can explore the different types of mortgages that offer low payments option.
Put a down payment you can afford
Putting a large down payment has numerous benefits. For instance, a significant down payment reduces negative equity risk, which can be helpful in case you want to sell the house. Also, placing a substantial down payment allows you to get a lower rate on the amount borrowed. This is because the lenders have a low risk and stand to lose less when you default.
Now, while there are advantages of having a sizable down payment, you should make sure you are not straining yourself financially. Ensure you have enough money for emergency, retirement, and upkeep. Exhausting your emergency fund is not wise, and can end up putting you in financial troubles.
Buying a house can be overwhelming for first-time buyers. However, with a sound decision and proper planning, the process can be smooth with little head-scratching. Whether you are eyeing the Los Angeles real estate or San Francisco, you should determine your budget, plus the amount you can afford for a down payment. You can use an online calculator to estimate the monthly payment to ensure you are making a sound financial decision.