Down Payment For Your Future Home

When it comes to owning a home, there are many aspects you’ll need to be financially prepared for, including utilities, insurance, taxes, and much more. While these considerations are absolutely necessary in the scheme of figuring out how much home you can comfortably afford, most people jump straight to the big number: The monthly payment on the mortgage, itself.

Your monthly mortgage payment is generally determined by the cost of the home, the interest rate applied to your loan, maybe the taxes and insurance assessed (if you include those expenses in your mortgage), and the term – or length – of  the loan. One component that can have a significant impact on your ability to get a loan and, subsequently, your monthly payment is the amount of your down payment.

Impacts of a Down Payment
The below chart shows the impact a down payment can have on monthly mortgage payments for different house price amounts at different interest rates. This reflects using a 30-year fixed rate mortgage. If you were to choose a shorter mortgage, payments would be higher, but the mortgage would be paid off faster with less money paid in interest, overall. Conversely, it may be possible to opt for a mortgage longer than 30 years which would decrease you monthly payments but will cost much more over the long run due to compound interest over a longer amount of time.

How a Down Payment Impacts a Monthly Mortgage Payment at Different Interest Rates

5% Down Payment

20% Down Payment

Home Price

3.5% APR

5% APR

6.5% APR

3.5% APR

5% APR

6.5% APR

$250,000

$1,175.34

$1,383.81

$1,610.02

$898.09

$1,073.64

$1,264.14

$500,000

$2,350.67

$2,767.61

$3,220.03

$1,796.18

$2,147.29

$2,528.27

$750,000

$3,526.01

$4,151.42

$4,830.05

$2,694.27

$3,220.93

$3,792.41

Collecting a down payment
When it comes to the down payment on your prospective home, most lenders will require a certain amount of cash, typically between 5% - 25% of the home’s price. Not only might the lender require a certain down payment but, to avoid having to pay Private Mortgage Insurance (PMI), you’ll need to put down at least 20% of the home’s value.

Of course, when it comes to a down payment, more is never a bad thing; in fact, the more a borrower is able to put down, the easier it likely is for the lending company to approve the loan. Not only does a larger down payment make the lender more comfortable granting the loan since it increases the borrower’s commitment to the property and decreases potential losses should the loan go into default, it decreases the amount of the loan and, therefore, makes the monthly payment more comfortable for the borrower, as well! All that being said, it’s a good idea to retain some savings reserves in the event you choose to make home improvements or should a major home repair become necessary.

Depending on the cost of the home, 5% - 25% could be a significant amount, one that requires some thought and planning. First, figure out how much of a down payment you want to have. This maybe a simple number (say $40,000) or, if you want to ensure you have a certain percentage of your prospective home’s value saved, you’ll need to consider the price point of your future home and then do some math (a 20% down payment on a $400,000 home will be $80,000). Once you’ve determined how much you want to have for your down payment, now comes the most important part: Getting the money! Remember, this is separate from the mortgage loan you’ll apply for in order to A few ways to accumulate the funds for a down payment may include:

  1. Save – Most people save for several years to amass the money for a down payment. How you go about this  depends on your vision for buying a home: What is the amount you’re wanting to accumulate? Do you have a timeframe in mind? If you have yet to determine the finer points of your goal, saving toward homeownership may be very general. For others, consider your details and apply some simple math (to save $50,000 in 5 years, you’ll want to save approximately $833 per month). Whether your saving is relatively general or more specific, be sure to integrate your monthly savings figures into your budget to ensure you can accommodate setting aside these funds. Once you feel comfortable that your finances will allow for this savings “expense,” put it into action by implementing automated savings funneling your money into a safe, separate account. Check with your financial institution regarding your options to automate savings and recommended accounts to keep these ear-marked funds separate from other funds.
  2. Assess and lower expenses – Look at your budget, evaluate your expenses, and take action to lower them. Shaving money off bills like cable, cell phone plan, and grocery/dining out budget, reducing high interest debt, and even foregoing occasional pleasures like a vacation can add up quickly. If you’re willing to go so far as to find a cheaper home or apartment, putting these savings aside can make a huge impact toward your down payment goal.
  3. Gifts – As you discuss your homeownership goals with those in your life, its possible that parents or family members may wish to contribute to your saving. A wonderful gift, different loan types have varying guidelines surrounding how much of the down payment can be gifted. Also, be aware that a gift letter may be necessary (and a good tool to ensure mutual understanding of the gift as a “give” not a “personal loan”).
  4. Extra earnings – Consider obtaining a second job or side-hustle with the sole goal of utilizing these earnings to further your goal of homeownership.
  5. Use your assets – In terms of any retirement plans you may have, many company sponsored 401(k) or profit sharing plans may allow you to borrow from your retirement savings: Make sure you’re aware of the limitations and repayment requirements of this borrowing, as well as the impacts such borrowing may have on your future retirement accumulations. Also consider any investments you currently hold including stocks, bonds, collectibles, and other valuable investments. Selling these valuables may help you gain down payment ground but keep in mind that doing so will also negate any future earnings (and losses).

For many, buying a home is the biggest purchase you will ever make: Doing so can be exciting, stressful, and fulfilling. The more you prepare for homeownership and its financial implications, the stronger you will be as a homeowner. Do some research, find out what options are available that fit your wants and needs, and take active steps to pursue your chosen option, including accumulating your down payment.