What is a Good Down Payment on a House?
A good down payment on a house largely depends on your circumstances and the loan you've applied for. Based on loan requirements and your risk profile the lender will determine the minimum down payment for the loan. In other words, it may not be up to you how much you pay -- though generally, a higher down payment will equate to lower fees and better loan terms.
Recommended Down Payment Amounts: Things to Consider
The amount of down payment required for your home will largely depend on:
The type of home loan: conventional loans tend to have a higher down payment requirement ranging from 5-20%. FHA loans loan may have down payments as low as 3%. Some loans may require no down payment at all like USDA and VA loan.
Your level of risk which will be measured by your credit score, credit report, loan-to-value ratio and level of income. If you are a low risk, you will pay a lower down payment than if you are thought of as high risk.
Your savings and income will also determine what you can pay as a down payment. Your savings and income will not only need to cater for the down payment but also the closing costs and the new house expenses (e.g. taxes and insurance).
The above factors will largely determine the minimum down payment you should pay. How much above that minimum you pay will depend on what your financial plan is.
How Much Should I Contribute for a Down Payment?
Keep the following in mind when deciding how much you want to pay as down payment:
A down payment immediately secures equity in your home. This results in you building equity early in your ownership which could be useful in the future.
The down payment is equity bought at a lower cost then what is bought using the loan because it is priced with no interest. Assume you buy a home for $100,000 at a 10% interest rate. If you put 20% down, then you would have paid $20,000 for 20% equity. If you don’t make a down payment at all, you will have to acquire that same 20% equity for $22,000 ($20,000 at 10%) as part of the loan.
A down payment above 20% means you will be exempt from private mortgage insurance, which can save you tons in the long term.
A higher down payment reduces the risk on the loan which can result in lower rates. It also reduces the portion of the home that is bought by an interest bearing funding. Which leads to savings.
After the lender has stipulated on the minimum down payment requirements , it is left to your discretion to pay more than that or not.