Homebuyers may confuse how much they should put down on a house with the minimum down payment requirements set by lenders. The table below offers a brief look at how much is required for each loan program.
Choosing the right down payment requires a basic understanding of the effect a down payment has on your monthly payment and savings. The key is to find a happy medium that leaves some wiggle room in your monthly budget for the unexpected without cleaning out your savings account. Homebuyers should consider the following when mulling over their choices:
Homebuyers tend to make more than the minimum lender-required down payment. The median down payment percentage made by homebuyers is 13%, according to a 2022 report from the National Association of Realtors (NAR). Younger buyers tend to put down less money than older buyers.
FHA loans require upfront and annual FHA mortgage insurance regardless of your down payment amount. You can get rid of it after 11 years if you put down at least 10% at your mortgage closing, or by refinancing into a conventional loan after you reach an 80% LTV ratio.
If your down payment is less than 20% and you have a conventional loan, your lender will require private mortgage insurance (PMI), which is an added insurance policy that protects the lender if you can't pay your mortgage. This payment will be added onto your monthly mortgage bill, requiring you to spend slightly more per month.
Another cost savings: not being required to pay for private mortgage insurance (PMI) on conventional loans. PMI is insurance that a lender might require you to purchase for a conventional loan if your down payment is less than 20% because you would be considered a higher-risk borrower. This is an extra monthly expense you'll need to pay along with your mortgage payment, and it typically costs between 0.5% and 1% of the mortgage amount each year but may run higher. Keep in mind, FHA and USDA loans require a monthly mortgage insurance premium (MIP) and this will be required even if you put 20% or more down.
A down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home.
Suppose the purchase price of your home is $600,000. You can calculate your minimum down payment by adding 2 amounts. The first amount is 5% of the first $500,000, which is equal to $25,000. The second amount is 10% of the remaining balance of $100,000, which is equal to $10,000. Add both amounts together which gives you total of $35,000.
The fee you pay for mortgage loan insurance is called a premium. Mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of your mortgage. Your premium depends on the amount of your down payment. The bigger your down payment, the less you pay in mortgage loan insurance premiums.
To help you come up with a down payment, you may be eligible for the HBP. The HBP allows you to withdraw up to $35,000, tax-free, from your Registered Retirement Savings Plan (RRSP). You must use this amount to buy or build a qualifying home. You have up to 15 years to repay the amounts you withdraw.
First-time home buyers may be eligible for a shared equity mortgage with the Government of Canada. With a shared equity mortgage, the government offers you financing without interest. This helps reduce your monthly mortgage payment without increasing your down payment.
Making a 20% down payment for a home purchase has been the rule of thumb for a very long time, mostly because prior to 1956, that's what was required of potential homebuyers. That way, if someone borrowed money from the bank to purchase a house but suddenly stopped paying their mortgage, at least the bank would still have the 20% down payment as an insurance policy of sorts.
As you can see, there's a huge advantage to paying less than 20% upfront. You'd be able to save up for a lower down payment quicker, which would allow you to become a homeowner sooner. The extra money that you would have used for your down payment could also be redirected toward other expenses such as closing costs, inspections, renovations or moving materials.
As great as this may sound, there are still some ramifications to be aware of if you decided to put less than 20% down. Remember that private mortgage insurance payment we mentioned earlier That provision has stuck around ever since, so you'll need to pay those monthly in addition to your regular mortgage payments should you decide to go down this road.
Keep in mind, though, that private mortgage insurance applies to conventional loans. If you're taking out a Federal Housing Administration, or FHA, loan and putting down less than 20%, you'll still need to pay private mortgage insurance each month, but it'll be called a mortgage insurance premium, or MIP, instead of PMI.
It's also important to keep in mind that the lower your down payment, the more you'll pay in interest charges over the life of a loan. For instance, if you were purchasing a $500,000 home with a 20% down payment and a mortgage with a fixed APR of 5%, you'd pay $373,158 in interest over 30 years. However, if you were to purchase that same home with just 3% down, you'd pay $452,566 in interest over 30 years, plus the price of PMI.
While it's possible to make a down payment on a home that's less than 20%, you'll need to make monthly private mortgage insurance payments on top of your regular mortgage. However, these insurance payments can eventually be waived once you've built up 20% equity in your home. Considering a lower down payment can help fast-track a person's goal of homeownership, for some potential homebuyers, the additional expense may be worth it.
While there are benefits to a larger down payment, one must balance the pros and the cons. With a larger amount down, that money is no longer available to make other purchases or investments, so there is an opportunity cost. That money will also be tied up in your home, making it less liquid than cash.
There is no law or rule for a universal minimum down payment, but the more you pay upfront, the lower your monthly mortgage payments, the lower the interest rate you will qualify for, and the less likely you will be to have to pay mortgage insurance or other fees. Generally, however, 3%-5% would be the absolute minimum, and only for certain borrowers.
If you can afford to put a sizeable down payment on a property, the benefits include more options for a mortgage, lower interest rates, more negotiating power with a seller, and the avoidance of having to pay mortgage insurance and certain other fees. But if putting a large down payment would result in you not having enough money for other monthly expenses or your long-term savings goals, a smaller down payment may make more sense.
As of October 2021, the median home price in the U.S. is around $404,700. Assuming a 20% down payment, you would need $80,940 for a down payment, plus several thousand more for closing costs and fees to your lender, realtor, lawyer, and title company. Still, no set amount is required and home prices vary state-to-state and city-to-city. It's all dependent on what you're looking for in terms of size and type of property, neighborhood, amenities, and any other details specific to your situation.
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While many people still believe it's necessary to put down 20% when buying a home, that isn't always the case. In fact, lower down payment programs are making homeownership more affordable for new home buyers. In some cases, you might even be able to purchase a home with zero down.
If a buyer put 10-20% down, they may be more committed to the home and less likely to default. If there is more equity in the property, the lender is more likely able to recover its loss in the event of foreclosure.
A down payment on a house also protects you as the buyer. If you want to sell your home and the market drops, you might owe more on your property than it's worth. If you made a larger down payment when you purchased your house you may break even, or possibly make money when you sell.
If you put less than 20% down on a conventional loan, you may need to pay private mortgage insurance (PMI). The most common way to cover this cost is to pay for it in a monthly premium that's added to your mortgage payment. PMI usually equals 1% of your loan balance per year. Many lenders offer conventional loans with PMI for down payments as low as 5%, and some as low as 3%.
Unlike a fixed-rate loan, an adjustable-rate mortgage has an interest rate that can go up or down based on market conditions. The down payment for an ARM is typically between 3 and 20% and will require PMI for buyers who p