You probably know you need a down payment if you want to buy a house. But you may not know what a typical down payment is and what percentage of down payment you need to save.
This is a question you need to confront early on because the amount of your down payment on a house can affect the amount of mortgage interest you’ll need to pay over the lifetime of the loan. Essentially, the more cash you can afford for a down payment, the less you’ll pay in interest payments!
There are also other substantial benefits for having a higher down payment but first we’ll discuss what you should save for a down payment on a house.
The ‘Magic’ Number of 20%
If you can manage to save a 20% deposit for a down payment on a house then you’ll be doing better than most homeowners. While this is the ‘magic’ number for a down payment, according to a survey by The National Association of Realtors (NAR) the national average down payment on a house is more like 10%, and a first-time home buyer down payment may be as little as 4%.
This may make you breathe a sigh of relief, but financial experts say you really should aim for 20%. This is like a litmus test for a bank, as it will show you can afford the home in the first place. It proves that you have positive cash flow and that you can save money on a consistent basis.
Even though it may be easy to obtain a mortgage with little-to-no down payment, it doesn’t mean it’s the right thing to do. Not having any equity in your home can make you susceptible to market volatility if house prices drop, so you could end up having negative equity. Always work with your trusted lending and finance professionals to make the right choice for you and your situation.
Benefits of a Higher Down Payment
Here are some of the benefits of a higher down payment:
- It depends on the lender and their loan criteria, but in general a higher down payment increases your chances of getting your mortgage approved because you’re not seen as a high credit risk. You may also be offered lower mortgage loan rates from lenders.
- You can pay off your mortgage faster if you put down a higher down payment and your monthly mortgage payment will be lower, saving you tens (or maybe hundreds) of thousands of dollars in interest.
- If you pay a 20% down payment you won’t be required to have private mortgage insurance (PMI). This means you avoid paying PMI premiums on top of your loan payments. These premiums are up to 1% of the mortgage loan amount annually, so it can be pricey.
How to Save for a Down Payment
Now you know why you have to save for a down payment on a house, but you may not know how. This part is easier than you may think, here are some tips:
- Figure how much you need to save
- Create a budget and stick to it
- Cut down on unnecessary costs
- Set up a weekly automatic payment to a high interest savings account
- Save any windfalls, bonuses or tax refunds.
Once you get started keep focused on your goal with the knowledge that the more you save the less you’ll pay on your mortgage, happy saving!