“Down Payment” is defined as an initial payment made when something is bought on credit. But who defines how much your down payment should be? These days you see as little as 5% and as high as 50% down payments in the real estate market. For majority of people purchasing a home is the biggest financial commitment they’ll make in their lifetime, but don’t let that intimidate you. If you’re serious about being a home owner, there are lots of resources out there to help make this into a reality. Many say a safe down payment starting point is 20% but here are a few pros and cons for making both high and low down payments:
20% Down Payment
1/5th of the total price might sound like a lot initially gone from your pocket, but if you put a 20% down payment you’ll ultimately end up paying less. This amount eliminates the requirement to pay mortgage insurance, which can add several hundred dollars a month to your house payments. Your stake won’t be considered too small if your down payment is 20% or higher, and therefore lenders will see you as higher value.
Another advantage of making a 20% down payment on your home is that it’s often the point (depending on your lender) where you get a more favourable interest rate.
20% or Under Down Payment
Millennials and first time home buyers can take a breath. Can’t afford making a 20% payment? Not to worry, there are plenty of lenders willing to accept a smaller chunk, especially if your income is below a certain amount. Although, regardless of finding decent terms with a lower down payment, you will pay through a longer mortgage period and have higher interest rates, ultimately making the property more expensive.
20% and Over
If you have a low credit rating then you are required to put down a higher down payment to be considered for a loan. All in all, the higher initial percentage you pay, the less you will have to pay in the long run.