How to Strategize a Down Payment
A down payment on a home is likely one of the largest amounts of money that a person will ever spend at once. There are a number of ways to approach a down payment, depending on the property a homeowner wants and what they are able to spend.
Down Payment Rules
The most oft-repeated number for a down payment is 20% because it allows homeowners to avoid paying for Private Mortgage Insurance (PMI), an insurance policy that's made for the lender but paid for by the owner. However, many homeowners cannot supply a 20% down payment. PMI fees will generally disappear as soon as a homeowner reaches 20% equity in their home.
Down Payment Minimums
The minimum for a down payment will depend on both the type of loan and the lender a homeowner chooses. Conventional loans have historically had a 20% minimum, but their criteria has come down in an effort to compete with FHA loans. Now, a homeowner might be able to put down just 3% on a conventional loan or 3.5% on an FHA loan. USDA and VA loans might not require any down payment at all.
When to Jump In
Homeowners who supply a higher down payment will have lower monthly premiums. Not only will homeowners pay off more of the principal of the loan, meaning less will go toward interest, but they also get closer to achieving the equity they need to either eliminate or reduce insurance fees. However, there are a few unique situations where homeowners can consider jumping in regardless:
- High-income owners: Owners with a strong annual income may benefit from buying, even without an equally healthy savings account. In this case, it may be possible to pay off the loan faster in the beginning. Or, it can open up more investment opportunities that are more lucrative than the savings they'll receive from building more equity.
- Popular neighborhoods: Up-and-coming neighborhoods will often become popular sooner rather than later. If owners have the chance to buy on the rise to the top, it may make sense for them to buy without the most impressive down payment.
Borrowers should talk to several lenders about everything from lender fees to amortization formulas when planning to move to Baton Rouge and buy a house. Visiting more professionals will give borrowers a sense of what is normal for their area and can see what they qualify for. For example, USDA loans might be available in certain zip codes, an option that can help buyers eliminate the need for a down payment. VA loans are available to military members and surviving spouses, an option that can help buyers save on their down payment. Each buyer's down payment strategy will differ depending on their financial goals, the home they want, and the lenders in their area.