304 North Cardinal St.
Dorchester Center, MA 02124
304 North Cardinal St.
Dorchester Center, MA 02124
Deciding how much to put down on a house requires balancing liquid cash with other priorities, but economic conditions in the post-pandemic world and a hot housing market have added a twist.
In today’s seller’s market, you need every advantage you can muster to make sure you are in a good position to land the house you want. Coming up with a large down payment could make it easier to win a bidding war because it improves your odds of getting approved for a loan.
So, how much should you put down on a house? Here are some things to consider.
If you’re wondering what percentage you should put down on a house, 20% down is the rule of thumb, but there is no one-size-fits-all figure. For example, some loan programs require a down payment as little as 3% or 5%, and some don’t require a down payment at all.
The primary reason to consider a 20% down payment is that, if you have a conventional mortgage loan, that’s what you need in order to avoid private mortgage insurance.
There’s no right amount to put down on a home, but there are some guidelines to consider. What you put down depends on your monthly housing budget, your loan program, your cash in reserve, your plans for the home and the market’s current conditions.
The larger your down payment, the lower your monthly mortgage payment. While 20% is a good rule of thumb if you can afford it, there are opportunities for lower down payments – some even require no down payment at all.
Specifically, you can get Federal Housing Administration loans with a 3.5% down payment. Lenders also offer conventional loan programs with 3% down, including Fannie Mae’s HomeReady mortgage and Freddie Mac’s Home Possible mortgage. With Veterans Affairs and U.S. Department of Agriculture loans, there’s no down payment requirement.
The reality is that many homebuyers put down much less than 20%. According to the National Association of Realtors, the median down payment for all buyers in 2023 is 14%. That’s up from 12% in 2019. Down payments for first-time buyers were around 6% to 7% between 2019 and 2021,while repeat buyers’ down payments were around 17% during that period, NAR data shows.
Among many factors, your finances and your goals for the home can help you choose the right down payment amount.
How much money should you put down on a house? Here are some questions to consider:
Only you, and not lenders, can determine your ideal down payment. You can come up with that figure by giving thought to:
The monthly mortgage payment you can afford. The more money you put down, the less you have to borrow and the lower your monthly payments will be. Typically, you need to put down a lot to make a big difference in your monthly payment because home loans are so large.
If you have flexibility with how much you can put down, run some numbers to see the difference in your monthly payment and what’s best for your budget. Let’s look at an example using a $250,000 home.
A 30-year fixed-rate mortgage at 3.5% interest and 3% down would result in a monthly principal and interest payment of $1,088.
Putting 5% down drops your monthly payment by only $22, but 10% down means a monthly savings of $78 compared with a 3% down payment. That can make a big difference over time.
A mortgage calculator can be a helpful tool to use for estimating a comfortable payment. Keep in mind that lenders prefer your mortgage payment, plus taxes and insurance payments, to be less than or equal to 25% to 28% of your gross monthly income.
Private mortgage insurance. If you put down less than 20% on a conventional loan, you could be on the hook for private mortgage insurance, or PMI. If you can’t afford a 20% down payment, PMI may be a given.
Also, mortgage insurance or similar fees are required on some government-backed loans, regardless of how much you put down.
But if you can reasonably afford to avoid PMI, you may want to do so by making a larger down payment.
Interest rate. As you increase your down payment, your interest rate may decrease because you pose less risk to your lender.
Overall, interest rates remain near record highs. If you can stretch to make your down payment large enough, you could score a lower rate.
Closing costs. As you’re deciding how much money to put down on your next home, consider your closing costs. These costs typically amount to between 2% and 5% of the house’s price, and you can pay them upfront or roll them into your loan.
Paying closing costs upfront means you can’t use that money for your down payment, but financing the costs will increase your monthly payment and total interest charges. You’ll pay either way but need to decide what makes more sense for you.
Emergency savings. The more money you put down, the lower your monthly mortgage payment because you’re financing less of the home’s purchase price. But if you drain your savings account, you could set yourself up for trouble.
“Putting the most you can in as a down payment will keep your monthly payments low and help you build equity faster,” says Nadia Aziz of CoreLogic, a leading provider of data for housing market participants. “But homebuyers should also make sure they leave enough money in their bank accounts to continue to pay for living expenses, food, health and more. Being a homeowner also means covering the costs of maintaining the property, which should be accounted for in your monthly budget.”
Homeowners should strive to keep three months of mortgage payments in a savings account. That way, you can address financial emergencies that come up without impacting your ability to make your mortgage payments and meet other financial obligations.
You’ll also need to set aside a portion of your income for general home maintenance. Save at least 1% of your home’s value annually for costs ranging from a new roof or furnace to landscaping or painting.
Plans for the home. A loan program with a low or no down payment can be appealing, but it puts you at risk of negative equity if your home’s value decreases. That means you owe more than your home is worth, which is also known as being underwater on your mortgage.
That’s not a problem if you plan to stay in the home long enough to build more equity. But this could be a problem if you need to sell your home soon after buying it.
That’s not to say you should be wary of loan programs with a high loan-to-value ratio, says Rob Wilson, vice president, correspondent and warehouse sales executive at Merchants Mortgage.
“They serve a great purpose in creating homeownership. They can allow many more people to obtain homeownership and begin building wealth,” Wilson says. “But homeowners should be aware of their leverage and additional costs that come along with homeownership. Making sure you have adequate reserves will provide peace of mind.”
Competition. If you’re in a seller’s market, you’re likely competing against multiple offers. According to Aziz, a bigger down payment could give you a significant advantage.
“With a higher down payment, there’s less opportunity for fallout during the financing process,” she says.
State programs, for example, might offer a grant or a second mortgage to cover a down payment and a portion of closing costs for creditworthy borrowers who meet lending requirements.
Some programs are available only to low-income homebuyers and may come with strings attached. You may need to live in the home you buy for a certain amount of time, for example, before a second loan covering the down payment and the closing costs is forgiven. Otherwise, you’ll need to repay the amount you received.