What is a Down Payment?
A down payment is the money that you use to purchase a home.
Your down payment amount will affect:
- Your monthly mortgage payment
- The interest capitalized on the loan
- The amount of private mortgage insurance (PMI) and if any would be required
Your Down Payment and Monthly Mortgage Payment
The larger your down payment, the less you pay towards your mortgage each month.
For example, let’s look at a home priced at $230,000 and purchased with an interest rate of 4.5%/ ___%APR with a standard, 30-year fixed-rate mortgage.
Two different down payment amounts (10% and 20%) will produce very different monthly payments.
- A down payment of 20% ($46,000) would make your monthly mortgage around $923 dollars.
- A down payment of 10% ($23,000) would make your monthly mortgage around $1048 dollars.
The exact amount depends on where the home is located, extra fees and other factors.
*The above loan examples are for illustrative purposes only. The rate expressed may not be a rate we offer at this time. The monthly payments do not include taxes, insurance, PMI or HOA (if applicable), so your actual payment obligation will be greater.
Your Down Payment and Private Mortgage Insurance (PMI)
If you pay less than 20% for your down payment, PMI will be added onto the conventional loan. This is a cost of around 0.25 to 1.5% of the mortgage amount on a yearly basis (rate determined by LTV and credit score).
Using the above loan example of 10% down, on a home priced at $230,000, this amounts to $2,588 per year or $215.63 per month (Based on a 1.25 factor for PMI). This amount stays until you have 20% equity in your home.
You can request that your servicer cancel your PMI when your principal mortgage balance falls to 80% of the home’s original value. Or even if you don’t make a request, the servicer must automatically terminate your PMI on the date your principal mortgage balance reaches 78% of the home’s original value.
If you have less than a 20% down payment, you can shorten the time you pay PMI by:
- Increasing your monthly payment to reach 20% equity
- Having as large a down payment as close to 20% as possible
- Purchasing your home with a special loan program such as the VA loan (which has no down payment requirements and requires no PMI. However, VA loans do require a funding fee.)
How Much Down Payment Do You Really Need?
A common misconception is that you must have a 20% down payment of the purchase price to buy a house. That’s not the case, and many loan programs allow you to buy a home with as little as 3.5% or even 0% down!
Government loan programs secured or insured by the Federal Housing Administration, also known as FHA loans, are a great way to buy a home with as little as 3.5% down. The Department of Veterans Affairs allows for a 0% down payment program for active or retired service members. These VA loans also have some of the most competitive rates in the market. Other loan programs include a USDA loan, which is for rural and suburban homebuyers. This loan is issued through the United States Department of Agriculture and also has a 0% down payment option.
On average, first-time buyers put just 6% down and repeat buyers put 14% down.*
The most common loan types require as little as 0% to 3.5% down.**
- VA = 0%
- USDA = 0%
- Conventional = 3%
- FHA = 3.5%
* Source: NAR’s Profile of Home Buyers and Sellers – July 2017.
** The loan programs listed below have varied requirements: VA Loans: 100% financing up to county loan limits may be available for purchase loans. Minimum FICO score and other restrictions may apply. USDA Loans: Purchased property must be in a USDA eligible area. Primary residences only. Income, credit and other restrictions may apply. Conventional Loans: 3% down payment on purchase of primary 1-unit residences allowed. Income and other restrictions may apply. Please contact us for more information.