Whether you are preparing to buy your first home or you are thinking about upgrading or downsizing, the important matter of your down payment should receive your attention early in the process. Generally, you may have some flexibility with regards to the amount of your down payment. With this in mind, how much should your down payment be? The answer to this question will vary from person to person based on several factors. When you understand the full impact of your down payment amount, you can make an educated decision that is best for your situation.
Mortgage Loan Options
There are a variety of low-down payment loan options available today. For example, if you qualify for an FHA loan, you may only be required to make a 3.5 percent down payment. The VA loan program enables qualified applicants to put no money down. The actual options available to you will be based on your qualifications, so you should speak with a lending professional to determine the minimum amount that you qualify for.
The Impact on Affordability
Your mortgage loan options will put a minimum cap on your down payment amount, but should you make a larger down payment? Your down payment directly detracts from the total amount of money that you borrow. This means that a larger down payment today will establish more affordable monthly payments for as long as the loan is in place. Consider looking at the size and quality of homes that you can afford to buy with a low down payment, and compare these to the homes that you could afford if you put 10 percent, 20 percent or more down. This will give you a fair idea about what down payment may be realistic for you.
Initial Home Equity
One other important factor is home equity. In many cases, the down payment amount equates to the initial equity in the home. With a lower down payment, you are increasing the chance that you could go underwater with your mortgage if the market takes a downturn. As a rule of thumb, you should estimate that the cost to sell your home is approximately 10 percent of its value. These costs relate to real estate commissions and closing costs that you may be responsible for as a seller. With this in mind, you may want to put at least this much money down on your new home so that you have the option to sell quickly if the need arises.
You can see that your down payment amount has many effects that require close attention. While there are benefits associated with making a larger down payment, you understandably do not want to be cash poor after the purchase. Now that you understand the full effects of a down payment on your finances and on your housing situation, you can make a more educated decision.