As you consider how much cash it takes to purchase your home, it is critical that you understand what it is going to cost you each and every month, not just the closing day. If you are trying to decide how much down payment you will need to purchase a home, think about these downsides. Waiting until you have 20% down payment could result in huge opportunity costs once you consider what you will be spending on rent every month.
It can be more cost-effective over the long term to purchase the house now versus paying rent while saving up for the 20% down payment. A larger down payment can make you more competitive as a buyer, as you will be seen as more trustworthy, less likely to haggle, or have to ask sellers to cover closing costs. Either could be a good choice, especially if you are making the minimal down payment, such as 5 percent, and adding closing costs would increase your outlay considerably.
For example, if you are buying a $250,000 house and you want to be prepared for all expenses, you would need to put away 5% of the purchase price, or another $12,500 over and above the down payment, to cover closing costs. If we are using $250 again as the example, you will need anywhere from $5,000 to $12,500 for closing costs, assuming that the seller does not provide you with any credits for anywhere from $5. For a $250,000 house, you would need at least $50,000 for the down payment. If you are looking to make a 3% down payment on a $280,000 home, you will have to come up with $8,400 of liquid savings.
With a 20% down payment, you would be paying $20,000 per $100,000 in house value. For example, for a $300,000 house, the 20 percent down payment will come to $60,000. On a $200,000 home loan, you will have to come up with $4,000-$6,000 on top of the down payment.
To avoid paying 20% PMI, you need to put 20% cash down on the mortgage. You will be paying the PMI until your loan is worth less than 80 percent of your homes value. If you are on a conventional loan and have less than 20% down, you pay private mortgage insurance (PMI) until you build 20% equity in the home. You will get the most favorable mortgage rates and avoid paying PMI by making at least 20 percent down.
If you are buying a house with a mortgage, consider saving enough to cover loan-related expenses, plus another 3-5 percent. If you are rolling homeowner insurance and property taxes into the mortgage payments, you will need to have enough money for these costs as well. The up-front costs of buying a house will vary depending on things like how much the house is worth, what kind of mortgage you are getting, and what your neighborhoods property tax rates are. How much money to put down overall depends on where you live, how much you need to put down, and how large a mortgage you want to take out.
Exactly how much you need to save up for a house depends on several factors, such as the price of the house you are targeting and the amount of money you plan on pushing toward a down payment. There is not really any fixed amount that you have to save up for to make the down payment on a house, but there are minimum down payment requirements, which may fluctuate depending on what kind of loan you are going to get on your mortgage. Saving for a down payment is one of the biggest challenges of buying a house.
One of the biggest surprises of buying a house is finding that you will need much more money than a down payment to close on a house. It is hard enough saving up a down payment for a house, but then finding out you need a little bit more — often much more — in order to close on the deal. The biggest, most crucial expense you have to be concerned with is your down payment. The biggest expense of the homebuying process is probably going to be your down payment.
Down payments are going to be the hardest to come by, since they are typically about 20% of a homes value. To purchase a house, typically, you will need 3% of the homes value as your down payment, with 1.5% going toward closing costs. If you are getting a mortgage, the smartest way to buy a home is to have at least 25% of the sales price saved in cash to pay the down payment, closing costs, and moving fees.
If you earn $72,000 per year — the income of an average first-time homebuyer — this is almost $30,000 that you would have on hand to pay the down payment, closing costs and moving fees. Ultimately, having at least 1.5 times more than a down payment available to cover all of the associated expenses for your first home (including the down payment itself) is the smarter choice.
As you can see, you may need more than 1.5 times the amount of the down payment to be successful at closing on the house. On a loan of $200,000, that means that you could potentially be paying $6,000 to close on $200. Besides your down payment, closing costs are another big one-time expense that you have to make before you can close on a home.
Something to remember when saving up for your down payment and closing costs is that putting less down upfront on your house typically means having to pay more each month for your mortgage insurance premiums.
For most people, a down payment is somewhere between 5% to 20% of a homes purchase price, but for FHA loans, that could go down as low as 3.5%, while for unconventional loans, or condo loans, that might be 25%.