You finally found the house that checks all your boxes, and now you must decide on a down payment. How do you know how much to put down on a house?
What is a down payment?
A down payment is a percentage paid upfront when mortgaging a home.
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Yes. Not only does it prove to lenders that you are a good mortgage loan candidate, it can help lower your monthly mortgage payment and save on interest.
What is the average down payment on a house?
Down payments vary, based on the state, price of the house, type of mortgage and age of the buyer. According to one report, the average down payment for a house nationwide for the second quarter of 2023 was 14.4%. The National Association of Realtors (NAR), though, reported that the average down payment for first-time homebuyers has been between 6% and 7% since 2018. Repeat homebuyers put down about 17% last year.
At the same time, home prices continue to rise. The NAR noted that the national median price for existing homes of all housing types was $393,500 in March, up 4.8% from the same month in 2023.
Despite those numbers, Steven Vieira, director of mortgage sales and operations for AAA Northeast Bank, advised putting down 20% of the house price once a selection is made. That way, buyers can avoid paying for private mortgage insurance.
Preparing and saving for your down payment
Before launching a house hunt, you should first be prepared financially. “Homebuyers need to create a budget for purchasing a new home,” according to Vieira. “Through this process, they must determine how much money in total they can spend on the purchase while avoiding any financial hardships post-purchase.”
New homebuyers need to calculate the overall cost of purchasing a home, he continued. This includes the closing costs, taxes, the first year’s home insurance and an escrow account to pay future taxes and insurance. In addition, homebuyers should budget for “settling in” costs including moving, new appliances, furniture and supplies to maintain the home.
Leave yourself a cushion
Putting down less money can lead to higher loan costs or problems qualifying for a loan. “Often, the lower the down payment, the more expensive the loan becomes in terms of closing costs, mortgage insurance, higher payments and of course, higher interest rates,” Vieira noted. “Many lenders have more stringent underwriting guidelines for lower down payment loans due to the increased risk of default.”
At the same time, a larger down payment puts buyers at risk of not having enough cash to address unexpected repairs or necessary improvements to the home once they settle in. “After the excitement of moving into a new home wears off, many homebuyers will start to see items they may have overlooked during the purchase,” according to Vieira. “For example, replacing flooring or updating plumbing can be expensive improvements and if the buyer put all their money into a larger down payment, they may be stuck after the purchase trying to figure out a way to pay for these improvements.”
This is why it’s critical to set aside an emergency fund to dip into when those issues arise, said Vieira, and only then determine your down payment. “Once these costs are all accounted for, then the buyer will be able to determine the right down payment to fit their budget and put them in a good position for success.”
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How much did you put down when you bought a house? Do you wish you put down more or less?
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My daughter bought her condo with financing thru Mass Housing with a 3% down payment. As for mortgage insurance which is usually required when the down payment is less than 20%, the lending bank also provided lender paid mortgage insurance. Her initial interest rate was higher due to that but she refinanced her loan when the interest rates dropped.