When purchasing a house, there are many different aspects of finances that you have to consider and calculate such as the average down payment, the closing costs and the home insurance. When purchasing a home, you are required to pay a down payment that is usually 3 to 20 percent of the total price of the home. This may help you to avoid paying the private mortgage insurance (PMI). This down payment calculator would assist you to understand how the down payment will affect the loan.
What is a Down Payment?
A down payment is the initial part of a payment that is sometimes needed to complete the purchase of the items that are usually more costly, in particular a home or a car. In the case of buying a house, once a down payment has been paid by a home-buyer, the rest of the balance will be amortized as a mortgage loan which has to be paid by a buyer. That is, the value of a house bought must be the sum of the mortgage loan and the down payment. In other words, a home down payment is given as a percentage of the home price. In the case of a 250,000 home, 3.5% is 8,750 as a down payment, whereas 20 percent amounts to 50,000.
How much down payment is required for a house?
The amount of down payment is one of the factors to consider when buying a home. The best down payment to strive towards is usually 20 percent since this will enable you to save the extra expense that is incurred in regard to private mortgage insurance (PMI). PMI is often not required with a 20 percent down payment, which pays off in the long term. In that case when you have a down payment other than 20; you might be required to pay PMI until you have accumulated 20% equity on your home.
With that said, you should not feel bad that you have not accumulated the entire 20%. A good number of lenders provide mortgage alternatives with less down-payments and hence you may still acquire a loan with lower initial payment.
How do I calculate down payment with Down Payment Calculator?
Down Payment = Home Price x Down Payment Percentage
In the case of an example of a $300,000 house with a down payment of 20 percent, your down payment would be 60, 000.
Different types of loans and the down payment requirement in the U.S
The amount you are required to deposit when you are purchasing a home in the United States will depend greatly on the kind of mortgage you are opting.
Conventional Loans
The traditional loans that follow the rules of organization such as Fannie Mae and Freddie Mac can have flexible down payments. The standard mortgages accept a down payment as low as 3% and particularly to first time home buyers a higher payment may be expected based on your credit score and lender requirements. In case your down payment is lower than 20%, then you are normally obliged to resort to paying with private mortgage insurance (PMI) until you establish a minimum of 20 percent equity in the property. Rocketmortgage
FHA Loans
For those with less income or financial resources, programs are provided by the U.S. government to help them. The Federal Housing Administration (FHA) loan is one of the options and it does not need more than 3.5 as a down payment. However, FHA loans have also caused other cost implications such as an upfront mortgage insurance premium (1.75% of the loan amount) that is paid during closing. FHA mortgages have monthly insurance payments that continue to the end of the loan term unless you later refinance to a conventional loan.
VA Loans
Moreover, the Department of Veterans Affairs (VA) provides no down payment loans to qualified military personnel (veterans and active-duty).
USDA Loans
There are also other programs such as the USDA loans as well as the Navy Federal loans whereby homebuyers can purchase a house without a down payment.
Why is a 20% down payment often recommended?
It is usually recommended to deposit 20% down, as this will enable the borrower to pay no PMI which is a form of insurance that the borrower is covered by in case he defaults on the loan. The more down payment can also make your monthly mortgage payment low, the interest paid over the period to be less and you may have better chances of getting your loans approved. Nevertheless, 20 percent is not a mandatory amount.
Where to Get Down Payment Funds
The down payment funds can be availed through a variety of options to the home-buyers. The most popular one of them is by saving where people save money in interest bearing accounts such as savings accounts or Certificate of Deposits (CDs) among others. Although investments in stocks or bonds may pay more returns, it is also more risky.
The other alternative is a piggyback loan, whereby the buyers can divide their mortgage into two loans- one with a 80% first mortgage and 10 percent second mortgage with the rest being paid in savings. The strategy assists in evading personal mortgage insurance (PMI).
Local governments and charitable foundations have Down Payment Assistance Programs that offer grants to first-time home-buyers, but which often have need-based qualifications, and where the grant itself may be repaid in case of the sale of the home.
The Federal Housing Administration (FHA) loans are also allowed to receive gift funds where the down payments can be offered by friends or relatives as long as a gift letter is attached.
The amount of money that can be withdrawn by a person to purchase a first home can be done through a Roth or traditional IRA. Whereas Roth IRA withdrawals are not taxed and can be free, traditional IRA withdrawals can be taxed and face penalties without fulfilling any conditions. The exemption of first-time home purchases is offered at 10,000 dollars on each type.
Finally, a 401(k) loan will enable the account owner to borrow up to half or 50,000 dollars of the account value and repay it with interest but does not attract tax or penalty. However, this kind of loan may affect their mortgage eligibility and repayment ability and most plans have to be repaid within a span of five years.
Final Thoughts
One of the most significant stages in the planning of a home purchase is to understand down payment requirements. The type of loan, credit profile, and the assistance programs available all determine the amount that you would need initially. A down payment calculator can be used to compare two situations and select a mortgage that fits your financial objectives.
FAQs
Is it possible to purchase a house without down payment?
Yes, some loan programs, such as VA loans (to veterans and current military personnel) and USDA loans (to rural property), can include options of a zero-down payment. However, in order to be eligible on these loans one may be required to satisfy certain eligibility criteria. To verify your eligibility to the Department of Veterans Affairs or United States Department of Agriculture and with the help of a lender specializing in such loans.
What is the difference between closing costs and a down payment?
Down payment refers to the purchase price of the home that a purchaser has to pay at the cost of purchase in advance usually between 3-20%. The final purchase charges are known as closing costs and are not the down payment. Both of them will be paid at closing, but down payment will provide you with immediate equity in the home, and closing costs will not.
What is the impact of my credit score on my down payment?
Having a good credit score may mean you will pay less in down payment on some loans and your interest rate will be affected. As an illustration, the FHA loans have the lowest possible down payment of 3.5 percent, with a minimum credit score of 500-580. Standard loans are usually more strict (minimum credit score between 620 and 660) and can be rated better with higher credit scores. Having a high credit score will save you money in the form of borrowing as long as you are not changing your down payment.
What impact would my down payment have on my monthly mortgage payment?
The larger the down payment, the less you have to borrow in the form of loan and in most cases the lower the interest rate which translates to lower payments. Also, it is possible to save PMI since you must put down 20 percent or more, saving additional on monthly expenses.
What is a down payment assistance program and am I eligible?
The down payment assistance programs are financial aid programs that support the consumers who are eligible and in most cases they are the first time homebuyers or have a moderate income. The assistance may either be in the form of grants, forgivable loans or deferred payment loans. You can be eligible due to factors, including income, location and employment. Ask local and state programs or ask a lender what is available.