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A down payment might just be one of the most powerful tools in the homebuying process. Not only is it a determining factor in how much you’ll need to borrow, but it also impacts your rate, your payments, and mortgage insurance specifics. A bigger down payment can mean better terms, but a smaller one can help you become a homeowner sooner. 

For countless homebuyers, especially first-timers, figuring out how much to try to save for a down payment can be stressful, even overwhelming. With options ranging from just 3% to 20% and more, it’s easy to see how it can get confusing and intimidating. That’s where we come in. In this post, we’ll look at what your down payment really is, and what it can impact. Knowing how your down payment sizing can affect your loan gives you the power to prepare, putting you in a better position for any decision you make.

What Your Down Payment Represents

The down payment is the portion of your home’s purchase price that you pay upfront, at closing. It’s raw capital that you use to subsidize your acquisition of real estate, but it’s also immediate equity that you now have in that property. Lenders will typically say that it lowers their risk because “you have more invested” in the home. But anyone going through the hassle and stress of buying a home is already invested emotionally, and financial stress isn’t going to increase that emotional value in any meaningful way. 

When calculating your down payment, it’s important to remember that small changes now mean big differences later. Increasing your down payment by just a few percent can mean saving thousands in interest over the life of your loan.

Typical Down Payments

Low – 3% to 10%

For a majority of first-time homebuyers, saving a fifth of the total value of their first home is wildly unrealistic. Luckily, there are loan programs that can facilitate financing a home purchase with much smaller down payments. In some cases, the down payment requirement shrinks to just 3%. 

Conventional 97 loans, FHA loans, and even some programs from local banks or credit unions can make homeownership much more accessible. With options like these, buyers can get into a home much sooner, and without waiting years to build up a massive nest egg. 

That said, there are trade-offs. With a smaller down payment, you need a larger loan. A larger loan means higher monthly payments, and it means you’ll likely pay more for mortgage insurance. Are those trade-offs worth being able to enter the housing market? That’s a question you’ll need to answer for yourself. 

Midrange – 10% to 20%

Many homebuyers find that a midrange down payment is a practical and achievable middle ground. It has notable advantages over smaller down payments without the long grind of saving 20%. At the midrange level, you’ll probably qualify for more favorable terms. This means better interest rates and lower private mortgage insurance (PMI)  payments. 

With a midrange down payment, you show lenders that you have a solid financial foundation. This can make your application look much better and can give you more power behind your offer. It also gives you a pretty nice head start on building equity. Giving you more ownership value sooner than with a lower down payment.

Even though you may still have to carry PMI until you hit the 20% equity mark, the cost of your coverage should be lower. Buyers with stable income and moderate savings find this range to be comfortable, but effective, while delivering long-term savings, a lower down payment can’t. 

Substantial – 20%+

Despite consistent wage stagnation, the homebuying industry still considers 20% to be the “standard” for down payments. With 20% down, your monthly payments are lower because you’re financing a smaller portion of the home’s price. You’ll also build equity faster, which provides flexibility if you decide to refinance or sell in the future.

In addition, buyers who meet or exceed this threshold often find it easier to compete in a tight housing market.

What Your Down Payment Really Affects

The size of your down payment will affect nearly every aspect of your mortgage. It impacts the cost of your PMI, interest rate offers, additional points, and total monthly costs. If you’re putting down less than 20%, you’ll typically be required to buy PMI until you reach 20%. This protects the lender if you default, but it increases your monthly payment initially. 

Your down payment will determine the rates that are offered to you. Even a quarter-percent reduction can mean serious savings. A higher down payment also means your monthly payment is lower, since you’re borrowing less. This could reduce your monthly payment by hundreds for even modest properties. 

What’s the Right Balance for Your Budget?

The ideal down payment depends on your financial goals, current savings, and how long you plan to stay in the home. Start out by looking at your financial “big picture”. Consider your income stability, monthly expenses, and any future plans that might affect your ability to keep your commitment to regular monthly payments. Be sure you factor in plenty of wiggle room for insurance, maintenance, and various unexpected post-closing costs. 

Injecting Equity From Day One

Every down payment level comes with advantages, and the best option depends on what matters most to you. You can choose to start small or try to save for a larger investment, which could be a gamble in and of itself. 

If you want to sit down with an expert to talk about your options, reach out to our lending team. Start a conversation, share your budget and goals, and we’ll walk you through the best ways to achieve them.