Saving for a Down Payment? How Much Should You Save?If you are planning to purchase a home, you may have a lot of questions about down payments. The more you can pay up front, the less you’ll end up paying in interest over the years, thus saving money. This means it’s financially sound to save as much as you are able to use as a down payment. But still, how much should you save? And how long should it take?
Different Approaches to Down PaymentsIn a perfect world, we would pay cash for everything and not have to take out loans. Financing the purchase of a home means that over time you end up paying much more than the home is actually worth. For example, if finance $200,000 on a home with a 4% interest rate, you’ll end up paying over $140,000 in interest over the life of a 30-year loan.
However, paying cash for a home is just not an option for most people. Taking out a loan is the only way to make it happen. However, the more money you are able to put down initially in the form of a down payment, the less you’ll end up spending in the long run. In fact, it’s recommended that you put down at least 20% of the home’s purchase price as a down payment.
Do Lenders Require 20%?No, a 20% down payment is not required, but it’s recommended. FHA loans require as little as a 3.5% down payment, and many other loan offers require as little as 5%. There are some special programs that require no down payment at all.
However, when you put down less than 20% as a down payment, lenders perceive you as a bigger risk, so you will likely be charged a higher interest rate. You’ll even be required to pay for private mortgage insurance if your down payment is less than 20%. This means that your monthly payment, including your mortgage, interest, private mortgage insurance, property taxes and homeowners insurance from your Des Moines insurance agent, could end up being much more than you might expect.
Are There Other Benefits to Putting 20% Down?There are a number of other benefits to putting down at least 20% when you finance the purchase of a home. These include less risk that you’ll end up owing more than the home is worth and the ability to deal with financial problems because you’ll be paying much less each month.
How Can You Save for a Down Payment?Although a 20% down payment is ideal when financing the purchase of a home, it may not be realistic for all homebuyers. Nevertheless, it’s a goal you should aim for. Here are some suggestions for working towards that 20%.
- If you currently own a home, sell it before purchasing a new home. Any cash you walk away from the sale with can be used towards a down payment on a new home.
- Create or rework your monthly budget to allow you save. The truth is it may take longer than you would like to reach your 20%. Be patient and stick to your savings plan.
- Consider extra work. You may want to take on freelance work you can do on your own schedule, after your normal 9 to 5. You could find a second part-time job. Although this is clearly extra work, it may be worth it if it gets you in your new home.