Expert Advice Part 7: The Down Payment

One of the most common questions we receive from people purchasing their first home is how much of a down payment they should aim to make on their purchase. In any circumstance, the answer is always going to be, “As much as you can afford, up to a certain point,” but if you’re looking for more specific advice, the answer really varies from buyer to buyer. You need to consider such factors as how much money you have saved up, how much money you earn each month, the price of the home and how much of a loan a lender is willing to give you.

Here’s some information from a realtor about home down payments in Alpine, TX and what you should know about them as you prepare to purchase a home or other type of property.

What is the purpose of a down payment?

The down payment is the amount of money you pay directly toward purchasing a home in cash. The amount of money you put into that payment is really up to you, and will typically be described as a percentage of the overall price of the home rather than a specific number.

Say, for example, you purchase a $200,000 home and decide to put $40,000 in cash toward the purchase right off the bat. That amounts to a 20 percent down payment. A cash payment of $20,000 for the same house would be a 10 percent down payment.

There are very few people who can afford to purchase an entire home in cash, and even if they can, it may not be in their best financial interests to do so. The down payment is helpful in this regard because it prevents you from having to cover the entire cost of the home up front.

Keep in mind that you can’t always just randomly choose your down payment amount. In some cases, especially if you’re involved in particular mortgage programs, there will be minimum down payment amounts you’ll have to make. Most of these minimum amounts aren’t very high. A VA loan doesn’t require a down payment at all, and an FHA loan only requires a 3.5 percent down payment.

When talking about conventional loans, the rules are slightly different. You must put a minimum of 3 percent toward the purchase of your home with a conventional loan, but 20 percent if you wish to get a loan without private mortgage insurance (PMI).

PMI exists to protect the lender from borrowers that pose a higher risk of defaulting on a loan, those being borrowers who put significantly less money down than average or who have lower income or asset levels. If you opt for a conventional loan but put less than 20 percent down, you will have added PMI costs to your monthly mortgage until you get to the point where you have at least 20 percent equity in your home, at which point you can have the PMI canceled.

While PMI might seem like a negligible number when you look at individual payments, it can really add up over time, especially on more expensive homes when you don’t put a lot of money down right away. This is certainly a factor you’re going to want to consider when deciding how much of a down payment you want to put on your home purchase.

One final consideration to keep in mind is that it doesn’t always make sense to make an especially large down payment. Large down payments can lower your rate of return on your investment, so consider market factors as well when looking at the size of the down payment you’ll make.

For more information about home down payments in Alpine, TX, contact Carpenter Real Estate today.