5 Tips to Calculate How Much to Put Down on a House

Buying a house is part of the American dream. But so is making a down payment: an initial big payment that cuts down the total asking price of a house before settling into regular mortgage payments. While many Americans expect to make a down payment when buying a new house, few know how to calculate a good down payment amount. It’s tough to know how much you should pay initially when it’s always considered better to make a bigger down payment than smaller. Let’s break down the top five tips you need to know to calculate how much money to put down on a new house.

What’s a House Down Payment? 

In a nutshell, a house’s down payment is the initial cash that you pay upfront to make the expensive purchase. Modern homes typically cost anywhere between $150,000 up to millions of dollars depending on their location, size, aesthetic, features, and more. Very few Americans have the money on hand to pay for a house outright. Instead, they make a down payment to the seller as an expression of their commitment to the purchase. In exchange, the seller agrees to a mortgage. The new owners then progressively pay down the rest of the house’s cost over many years. The seller makes a little extra money in the long run due to interest accruing on the remaining amount. Down payments are usually expressed as a percentage of the total price rather than a flat rate. For instance, a common down payment amount of 10% for a $350,000 house would add up to $35,000 required at the time of purchase.

Do You Always Need a Down Payment?

Usually. It’s very rare when a bank or another home loan lender does not require a down payment in order to offer you a mortgage loan. From the lender’s perspective, the down payment commits you to the loan since it would be very costly for you to back out of the arrangement shortly after signing on the dotted line. Furthermore, mortgage lenders use down payment amounts as a kind of test to see if you’re really worthy of a mortgage loan. The thinking goes that, if you have enough for a good down payment, you can save enough month-to-month to make your regular mortgage payments as well. Bottom line: expect to pay a down payment when buying a new house except in the rarest of circumstances , such as when you know the lender personally. 

Down Payment Requirements

Generally speaking, the higher your down payment amount, the likelier you are to get approved for a mortgage loan with a decent APR. But there are varying down payment requirements depending on the mortgage loan you pursue. For example:

• VA or Veterans Affairs loans are guaranteed by the US government. These don’t usually require a down payment as a result, but only current and veteran military service members or their surviving spouses are eligible
• FHA or Federal Housing Administration loans are also backed by the federal government and require abnormally low down payments as little as 3.5%
• A few conventional mortgages from big lending organizations like Fannie Mae or Freddie Mac sometimes require as little as 3% of the asking price for a down payment. While these loans are not backed by the government, they do follow certain down payment guidelines that borrowers have to adhere to

Beyond these specific examples, note that mortgage down payment requirements vary from lender to lender. But they usually adhere to a few similar trends:

• The higher your credit score, the less of a down payment you may need
• The higher the down payment, the better the mortgage terms

For example, those with credit scores of 500 or so may be required to put down a 20% payment upfront unless the loan is backed by the federal government.

Is a Bigger Down Payment Always Better? 

Usually, yes. The circumstances vary from individual to individual, but when you make a larger down payment:

• You have to pay off less of your home over time
• You pay less interest overall
• Higher down payments usually lead to lower fees over the loan’s lifespan
• Your home has more equity upon purchase
• Your mortgage payment is usually lower

Remember, your down payment literally takes off a big chunk of the home’s total asking price. The more you knock off the total asking price initially, the less money you’ll need to pay over the rest of the mortgage’s term. Furthermore, your mortgage’s interest rate will be calculated based on its starting cost. The starting cost is calculated after your down payment. Say that you wanted to purchase a $300,000 home. Then, you made a down payment of $30,000 (or 10% of the asking price). Your resulting mortgage would have interest based on $270,000 instead of $300,000. So you would also pay less in the long run with your interest payments than if you scraped by with a smaller down payment. It’s almost always a good idea to pay as much of a down payment as you can reasonably afford. But you also want to avoid spending too much on your down payment beyond what you can realistically afford. There are ancillary costs you also have to consider.

How To Calculate a Good Down Payment Amount

With all this in mind, let’s take a look at how you can calculate a good down payment amount for your home purchase.

Find Your Total Available Funds

To figure out what a good down payment amount might be, you’ll first need to figure out how much money you can realistically and responsibly spend upfront when purchasing your home. To do this, add up all of the total savings that you've presumably prepared for your home purchase. Consider any savings you might have in your investment accounts as well.

Decide How Much You Want to Use for Other Home Needs

Once you’ve gathered up your total investments and savings amounts for your upcoming home purchase, have a talk with your spouse or anyone else who the home purchase affects and figure out how much of that lump-sum you need to use for other home-related things. These can include:

• Initial home renovations
• Costs for moving
• Costs for buying a new car

All of these costs can eat into your hypothetical down payment amount.

Save Some Cash for an Emergency

Don’t forget to subtract some of your funds for emergency situations . Many financial advisors recommend that you should save between three and six months’ worth of average expenses as a default emergency fund amount. If you can’t afford this, don’t worry – it’s just a rule of thumb. Bottom line: don’t totally empty your bank account when putting a down payment on a new house.

Factor in Closing Costs

Buying a home involves more than just paying the down payment. You’ll also need to pay various closing costs , such as realtors fees, title fees, and so on. Your home purchasing agreement will explain who is responsible for paying what closing costs (you or the seller).

Finalize Your Down Payment

Only after factoring in all of these extra costs can you start to look at your total down payment amount. Say that you’ve saved up $50,000 for buying a new home. Then you need to subtract:

• $3000 for moving costs
• $4000 for putting a down payment on a new car
• $500 for ancillary moving expenses, repairs, etc.
• $10,000 for an emergency fund
• $1000 for closing costs

When adding all of those values together, you get a total subtraction amount of $18,500. That leaves your actual down payment amount at $32,500. This is still a good down payment overall, but it goes to show that you need to calculate how much you can realistically pay before trying to buy a house. Otherwise, you may feel forced to sign a mortgage agreement with less favorable terms compared to what you initially imagined. A down payment of $32,500 will still usually allow you to get an excellent mortgage for a standard house, however, including low mortgage rates and interest rates.

Summary

Ultimately, it’s always a good idea to put down as much of a down payment as possible when buying a new home. But beyond "rule of thumb" amounts like 3%, 5%, or 10%, it’s also a good idea to calculate how much money you can part with immediately upon purchasing your home after considering the other costs that come with buying and moving into a new house. By calculating a good down payment amount, you’ll ensure that you can comfortably move into your new home and make regular mortgage payments without feeling stressed financially. Need additional financing tips, or want to look into personal loans to help you cover a down payment? Seek Capital can help with all of these things and more. Contact us today for extra assistance!   Sources https://www.investopedia.com/mortgage/mortgage-guide/down-payment/ https://www.bankrate.com/mortgages/current-interest-rates/ https://www.hud.gov/buying/loans