How Much Do I Really Need for a Down Payment?

Posted by Jessica Akright on Jul 21, 2016 05:00:00 AM

Topic: ALL

Husband and wife filling paperwork for down payment on home

Lenders are more focused on loaning money for ‘good’ mortgages than they were a decade ago. They’re not only working closely with buyers to ensure they don’t over extend themselves and buy a home beyond their means, they’re more cautiously evaluating potential borrowers situations, which may include how much of a down payment borrowers can make.

If you’ve got a good job, a savings account, and a good credit record, you may be thinking: “What’s the purpose of a down payment anyway?  I plan to make my mortgage payments each month.” 

The down payment is the way your lender protects their investment in your home and ensures you have some skin in the game.  Because you risk losing your down payment if you default on your loan for any reason, making it a strong incentive for most homeowners to keep up with their monthly payments.

Consequently, the more you can put down, the more confidence lenders have in your commitment to paying off the loan, and the better chance you’ll have of getting approved for one.  Even more importantly, a higher down payment may qualify you for a lower rate and closing fees.  Putting more money down also gives you a better start building equity in your new home.  

While 20% has become the earmark for a good down payment, not everyone is able to bring that much to the table when ready to buy.  After all, on a $150,000 home, a 20% down payment would be $30,000, and saving that amount of money is no easy feat!  

The good news is even if you don’t have that much yet to put down, it doesn’t mean you can’t consider home ownership. At Bank Mutual, our Loan Officers can determine if you qualify for a program that enables you to buy a home with as little as $1,000 of your own funds and 3% down. 

Although the option to put less money down may seem attractive at first glance, there are a few disadvantages to be aware of when making a decisions, such as:

  • With a lower down payment, you’ll most likely be required to pay mortgage insurance until you reach at least 20% equity. This runs one half to one percent of your loan and is added to your monthly mortgage payment.

  • With a smaller down payment, interest rate and closing fees may be higher.  

Funding your down payment, no matter the amount, may be another concern you have. Although most buyers save for their down payment before starting to house hunt, monetary gifts from family or friends who have offered to help out is not uncommon.  

Waiting to save enough may mean waiting longer to buy, but a larger down payment could save you thousands over the life of your loan, as evidenced in the chart below:

Smaller vs Larger Down Payment

To learn more, speak to a Loan Officer near you!