What Is a Downpayment And How Can I Afford it?

Dated: November 30 2021

Views: 163

In A Perfect World

You're sitting there. Bright-eyed and ready to buy a home. You and your partner are discussing the benefits of home ownership and are excited to go on a new journey of investment and growth. You find a home and would love to bid on it becuase you've done the preapproval and are ready to hunt. BUT.... there it is. The ever present dilemma that haunts every first-time homebuyer; the DOWN! PAYMENT! 

In a perfect world, the homebuyer will have their downpayment for a home ready before they even begin to think of looking for a home. That, of course, is not the case. Hot markets and excitement of homebuying drives us to look for homes. The process of searching through catalouges is a fun adventure that takes no tools aside from the eyes and imagination.

But what happens when it comes time to seal the deal on that home of your dreams? Are you sure that you have enough for the home? What will the downpayment be like? Do you think you'll have enough? Is it always 5% down? So many questions! This article will dicuss the ins and outs of down payments with homebuying and answer all questions related. In order to traverse the topic of down payment, we need to begin with what it is!

Why Do I Need It?

When dealing with buying a home it is important to keep in mind that you are not only dealing with the seller. A down payment is less of a promise to the seller that you will pay for the home and more of a promise to the lender that you are borrowing money from.

For the lender, a down payment acts as a security and promise that you, the borrower, are willing to pay. The relationship with the seller toward the down payment is thus nonexistent. The seller only cares about the selling price of the home (typically) and how much equity will come from that particular transaction!

 

How Much Do I Need?

The average down payment on a home in the United States is roughly around 6% of the loan amount. That being said, how much you owe up front will be entirely dependent on how much the home your buying is listed for. For example, a $200,000 home will have a different down payment than a $400,000 home (6% of $200,000 = $12,000 and 6% of $400,000 = $24,000).

Even though the average down payment is 6%, you DO NOT have to pay 6%. Many programs, loans, and organizations offer loans with lower down payments. Loans such as the FHA Loan only require a 3.5% down payment on a home, freeing the bulky front payment up greatly. Other loans such as the VA loan for veterans don’t even require a down payment at all!

The amount of down payment that you need to put down on a home is dependent on the type of loan that you take on the home. The best course of action when deciding which loan to take is to do as much research as possible and see which loan works best for you.

 

More Up Front, Less Later On!

It may be an odd idea to pay more up front on a loan to some people. Why would you want to give away all of your money that you’ve saved for so long to get?! Why on earth would someone put 20% down on a home when they can easily just put 6% down instead? The answer lies within your monthly interest payments!

The rule of thumb : The more money that you’re able to take out for your home, the less of a mortgage you’ll need! Less mortgage means less monthly payments on the mortgage! Let’s look at an example, courtesy of The Motley Fool: 

[Let's say you're buying a home for $300,000. If you make a 20% down payment of $60,000, and you lock in a 30-year fixed loan at 3.2% interest, you'll have a monthly payment of $1,038 for principal and interest on that loan. And you'll spend a total of $133,839 on interest in the course of paying off your home.

Now, say you have enough money in savings that you can make an $80,000 down payment on that same home. In that situation, you'll be left with a monthly mortgage payment of $952. You'll also spend $122,687 on interest while paying off your home. That's a nice amount of savings all in.]

 

But I’ve Lost All my Equity!

A huge mistake that people make when discussing homebuying is assuming that they are losing their equity by throwing it into a house. They believe that their money that they spent years saving is gone and their investment in their bank account is drained. How do you recover from a problem this big? Is a house really worth it?!

Well, good news and great news! The good news is that you haven’t lost any money when it comes to investing in a home. The great news is that the money that you put into your home is now making you more money instead of sitting in a bank account doing nothing!

When you start into buying a home, you are investing your money into an asset, or something tangible that holds value. Instead of your money sitting in an account, it is being used towards your asset (the house) and will appreciate in value because of the market and area that you are in! This is wonderful for young investors as this can act as the first real investment in your professional career!

But How Can I Afford a Down Payment?

The entire process of figuring out how much down payment you can afford begins with the preapproval process. With this process you are able to see how much you can afford when buying a home. That process will direct you towards which loans you will want as well as how much you want to put down.

After this decision, it is up to you to save and decide! Whether you choose the 50/30/20 budget rule, ask for gift money from parents, or use what is lying dormant in your savings account, savings for a home is the next hurdle if you are not already there!

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Ryan Giavasis

Ryan Giavasis began his real estate endeavor as a remedy towards solving his own financial freedom. Looking for financial autonomy and independence, Ryan searched and studied everything real estate an....

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