Deciding how much to put down on a house
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The size of your down payment depends on your resources and goals. Here are five things to consider to determine the right amount for you.
Home buyers, especially first-timers, often ask, “How much should I put down on a house?” The answer to this question depends on several factors. Here are five questions to weigh when determining the right amount for your down payment.
- What are the lender’s requirements?
Financing a home used to mean a 20% down payment but that is no longer the case. Some home loans are designed around low or even no down payments. As a general rule, the larger your down payment, the lower your expenses for interest and private mortgage insurance.
Many buyers get pre-approval for their loans, which is a great way to see how much you can borrow. However, what you can afford on paper may not match what you can personally afford. Evaluate how a home purchase will affect your other life goals.
- What are the overall costs of homeownership?
To avoid finding yourself in a financial crunch after buying a home, consider all the expenses that come with homeownership other than your mortgage, insurance and property taxes.
Utility bills will likely be higher in a home than an apartment. You’ll also be responsible for lawn care and any homeowner association dues. Figure 1 to 2% of the purchase price for annual maintenance and upkeep.
Be realistic about the total cost of homeownership and balance it with your desire to do other things like taking vacations or pursue education.
- What’s the state of your emergency fund?
Smart homeowners plan for the inevitable costs that come with homeownership. If the furnace needs to be replaced, they don’t find themselves financing a new one at a big-box store with sky-high interest rates. They dip into their emergency fund.
Choose a home down payment that allows you to maintain an emergency fund for repairs and the deductible on your homeowners insurance.
Keep in mind that you may need to use emergency funds in other situations too, such as the loss of a job, a serious illness or other life surprises.
- Will you need cash for improvements after the sale?
For many folks, one of the best parts of the home buying process is decorating and furnishing their new home. Make sure your down payment leaves enough cash to do the improvements you’ll want to do to make the house your home. Even basics like paint, carpet and furniture can add up quickly.
- Do you want to invest your money other ways?
Purchasing a home is different than other financial investments because it’s less liquid. If you want to cash out on a house, you have to go through the process of selling it. Depending on the market, a sale could happen quickly or take months.
While many people anticipate that home values will go up, it’s possible that they could remain flat or go down, decreasing your equity. This doesn’t mean buying a home is a poor financial choice. It does mean buyers should remember a couple of things. First, the primary purpose of a home is to provide shelter rather than generate equity (although it often does). Second, putting money into a house comes with the opportunity cost of not being able to invest those funds elsewhere.
Some home buyers find a balance between buying a home and making other investments by making a low down payment so they can also invest in other things, including CDs, retirement, and college savings.
The best time to figure out how much put down on a house is before you go house hunting. The second best time is when you’ve found a house you’d like to buy. Either way, run your figures before you make an offer to make sure the house makes financial sense for you.
If you’d like to learn more, listen to the podcast, Insider’s Guide to Buying Your Home, from our Money, I’m Home series.
Consumers helps more than 1,000 members finance land, first and second homes, and home improvement projects each year. When you need a mortgage or home equity line of credit, call us at 800-991-2221. We’re here to help you get the home of your dreams!