Once you make the decision to purchase your own home, there is a staggering amount of work to be done. Even after your forever home, or even a temporary home, comes along, the deal isn’t done until the official closing. With that comes all the fees and the costs associated with finalizing a purchase. Several decisions need to be made in advance to this final step, including how much money you are going to put down as an initial payment.
After you decide on the amount you are comfortable paying each month for a mortgage, it’s time to make the second most important financial decision regarding purchasing a home. Just like with a car, the amount you set as a down payment will have an impact on the size of your monthly bill. It’s important to note that the more money you put down upfront, the lower your monthly mortgage payments will be. Many home loans require a specific down payment that’s typically within 3% to 20% of the sales price of the home. There are 0%-down loans available, but they narrow your home options, as fewer lenders are willing to lend to homebuyers who opt out of a down payment. This is where you have to thoroughly examine your savings.
There are plenty of online calculators that let you see how much you will be spending each month based on the amount you are willing to put as a down payment along with other factors. The first thing you want to do is have all your necessary data ready. Once you look at your investments and your savings, it’s time to start subtracting money that is going to be used for other things.
One example would be to subtract out your emergency funds. This is money that should be able to sustain you for 3-6 months in case of an emergency, so that would not be applicable to a house down payment. In an ideal situation, that money shouldn’t need to be touched at all. The next money to subtract would be any amounts you are saving for other long-term life goals, such as continuing education or an automobile purchase. It is also beneficial to include monthly budgetary items such as groceries, transportation, and other expenses.
After examining all of these costs, you will need to set aside money for expenses associated with the actual move itself such as the moving company, as well as any home renovations and/or maintenance work that will need to be completed at the new residence. The amount that is remaining is the maximum amount that you have available to put for a down payment. Lenders typically prefer a 3.5% or 5% down payment amount. However to obtain the very best financing terms 20% down is usually required. However please note more than 75% of all homeowners put down less than 20% when they purchased.
Keep in mind that during a real estate closing, there are additional costs to consider. Plan on paying between 1.5-2.5% of the price of the home on closing fees, depending on lender fees, your loan type, your down payment amount, and your neighborhood.