How Big Should Your Down Payment Be?

Posted by Janis Penick on Monday, July 1st, 2019 at 6:02am.

Down PaymentsJust like houses, down payments come in all shapes and sizes. If you are in the market to purchase a new Bastrop home, your down payment will be an important part of this. Different types of loans have different requirements and as long as you meet the minimum requirements for your loan, you can choose to make a larger down payment if you want to. How do you know how big your down payment should be and what’s best for your personal financial situation?

This isn’t a decision you should guess at. Take the time to sit down with your mortgage lender and let them educate you on the different loan options and the down payment required by each. Your circumstances may dictate the kind of loan you qualify for and if so that will be one less decision you must make during the home buying process but you still need to take a little time to understand the terms of your loan and everything that goes along with that. Historically, many mortgage loans have required a 20% down payment to purchase the home but there are other options you may qualify for.

Reasons to Make a Larger Down Payment (20% or More)

  • The bigger your down payment, the more risk a lender will be willing to take on you. Depending on your credit history, this could mean the difference in being approved or denied. If you have blemishes on your credit history, a down payment of 20% or more will put the lender more at ease increasing the chances of having your loan approved. 
  • Private mortgage insurance (PMI) is required when you have less than 20% equity in your home. While PMI allows you to purchase a home with a smaller down payment, it can be expensive and will cut into the amount you can spend on a home by taking up some of your monthly housing budget. With a down payment of 20% or more, you can avoid paying PMI and use that savings to pay more on your mortgage payment each month, maximize your buying power or for anything else you choose. 
  • The larger the down payment you make, the lower your monthly payment will be. Likewise, if you are trying to stay within a monthly budget amount, a larger down payment will allow you to purchase a more expensive home if you choose to without your mortgage payments being bigger than you want them to be.

Reasons to Make a Smaller Down Payment (Less than 20%)

  • The biggest advantage to a smaller down payment is the ability to buy a home sooner if you don’t have enough savings for a larger down payment. The amount you save in rent will be significant over the time it would take you to save for a 20% down payment. 
  • Making a larger down payment could mean missing out on other opportunities and take away a significant amount of your savings that you might could use for something else.

Overall, the advantages to making a larger down payment when buying a home are greater than the disadvantages but it really depends on your personal situation. Sit down with your mortgage lender and determine the best long term solution for you.

The Janis Penick Team

RE/MAX Bastrop Area
Serving Bastrop, Cedar Creek and Smithville

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