Save Your Pennies for a Mortgage Down Payment
Conventional wisdom holds that in order to purchase a home, you’ll need to save up at least 20% of the total purchase price to have enough for an initial down payment. These days, though, you may be able to get a mortgage with as little as 3% down, or even nothing in some cases. But should you take advantage of those low-down-payment options, or are you better off waiting until you have a sizable sum of money to put down on a home? In this article, we’ll discuss how down payments work as well as tricks you can use to make saving up for your next home purchase easier.
We’ve already established that 20% used to be the standard for a down payment on a home, but why is that number such an important one? Well, when buyers put down 20% of the total value of the home, it provides the lender with a profit buffer. That way, if the borrower defaults on the loan, the bank can sell the home at a discount without taking huge losses. Banks don’t benefit from keeping distressed properties for extended periods of time. Every month that a lender is forced to maintain a foreclosed property only increases their costs, so they hope to get rid of distressed real estate as quickly as possible.
Benefits To Making a Sizable Down Payment
Buyers who make large down payments expose lenders to less risk, so they generally have more leverage than purchasers who lack the financial wherewithal to plunk down cash up front. With a down payment of 20% or more, buyers typically qualify for lower interest rates, which can save them tens of thousands of dollars in the long run. Statistically, anyone who is prudent enough to save up a large down payment is a lower-risk borrower, and interest rates are based largely on the risks associated with making the loan. Not only that, but buyers with down payments of 20% or more are able to sidestep the personal mortgage insurance required of those with smaller down payments. PMI protects the lender against losses incurred when borrowers become insolvent, or are otherwise unable or unwilling to keep making mortgage payments. For an average-priced home, PMI typically costs between $100 and $300 per month. Of course, larger down payments also mean that there is less interest to be paid over the course of the loan, which can equate to substantial long-term savings.
How to Save for a Down Payment
Saving up for a down payment on a home may seem like an insurmountable goal to some, but most of us can find ways to put away money for a modest down payment by taking smaller steps every month. And remember, you don’t have to save up 20%. Even if you’re only able to put away 5% of the sale price of your next home, you’ll be in a better position than you’d be with nothing to put down.
Looking for ways to save extra money towards your down payment? Here are 5 ways.
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