If you're in the market to buy a home, the amount of your down payment is likely top of mind: three percent, five percent, 10 or 20. There's no right answer for everyone; what is right for you depends on some key factors, namely your savings and monthly budget.
You've probably heard the rule of thumb that you shouldn't buy a home unless you can put 20% down. However, a growing number of borrowers are putting down between 5 and 10%. Additionally, you can put down as little as 3% through Freddie Mac's Home Possible AdvantageSM product.
It's true — the more you put down, the lower your monthly mortgage payment and the less you'll owe the bank. It's also true that homebuyers who put at least 20% down don't have to pay Primary Mortgage Insurance (PMI), an added insurance policy that protects the lender if you're unable to pay your mortgage. However, if putting 20% down will deplete all of your savings and leave you with no financial reserves, it's probably not in your best interests.
While you'll have to pay PMI for a conventional loan with a down payment of less than 20%, you'll still be able to take advantage of today's low mortgage rates and affordable home prices in most areas of the country. Plus, when you reach 20% equity in your home, you can drop the PMI monthly payments.
Breaking It Down: A $200,000 Home with Various Down Payments
|5% Down||10% Down||20% Down|
|Mortgage Type||30-year fixed-rate||30-year fixed-rate||30-year fixed-rate|
|Monthly Mortgage Payment
(Principal and Interest)
*Assuming an insurance rate of 0.51%; this cost can be cancelled from your payment once you reach 20% equity in your home for conventional loans, but not FHA loans.
**Does not include property tax and homeowner's insurance payments.
Remember to factor in closing costs, also called settlement fees, that will need to be paid when you obtain a mortgage – typically between 2 and 5% of your purchase price.
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