Despite those old myths, a 20% down payment isn’t necessary to buy a house. In fact, conventional loans require just 3% down, while USDA and VA loans require no down payment at all.
But while these low (and no) down payment options certainly make buying a home easier, it’s important to know the trickle-down effect a small down payment can have on your mortgage — and, more specifically, how much that mortgage will cost you over time.
Are you trying to determine how much you should put down on a house? Here’s how your down payment will influence your mortgage:
1. It directly impacts your monthly payment.
First and foremost, your down payment will impact your total loan balance and, subsequently, the amount you pay monthly to whittle it down. The higher your down payment, the lower your balance is and the lower your monthly payments are, too.
A low down payment may make it easier to get your foot in the door of that home, but it will also mean higher monthly payments — which could make affording your house harder in the long run.
2. It influences your interest rate, too.
The smaller your down payment is, the riskier you are to a lender. If you put down $5,000 on a $200,000 home, for example, that’s a lot of cash the lender’s on the hook for if you don’t make your payments. As a result, the lender will assign you a higher interest rate to provide some protection from this extra risk.
Conversely, a higher down payment could qualify you for a lower interest rate, since you’re less of a risk to the lender. That means a lower monthly payment and less paid in interest over the life of your loan — both good things for your pocketbook.
3. It could change your credit score requirements.
If you’re getting an FHA loan, then the down payment you make is directly tied to what credit score standards you’ll be held to. If you make a 3.5% down payment — the minimum for an FHA loan — then you’ll need at least a 580 credit score to qualify for your mortgage. If you make a down payment of 10% of more, then you’ll only need a 500.
4. It will determine if you need mortgage insurance or not — and how much you’ll pay.
With FHA loans, mortgage insurance is always required, but the amount you pay (and how long you pay it for) is influenced heavily by your down payment. If you make a 10% down payment, you’ll pay a 0.80% mortgage insurance premium annually for the first 11 years of your loan. If you make a 5% down payment or less, you’ll pay 0.85% for the entire loan term (usually 30 years).
On conventional loans, mortgage insurance is typically required if you make a down payment of 20% or less. The cost of this insurance varies depending on your specific loan and mortgage lender.
5. It influences how much equity you have in the home.
Finally, your down payment directly impacts your equity stake in the property. If you put 20% down, you automatically have 20% equity in the home from Day 1. That’s 20% you can tap via a home equity loan or cash-out refinance, and it’s 20% you’ll get back when you decide to sell. (You also gain equity when your home improves in value.)
What Down Payment Should You Make?
Do you need help determining what down payment would equal a mortgage you can afford? Get in touch with Premier Nationwide Lending today. We’ll help you find the best path forward.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.