Understanding and preparing for the down payment is an important step toward buying a home.
What is a down payment?
A down payment is not unique to the mortgage loan process. If you’ve ever bought a new car, for example, you’ve probably made a down payment. The down payment on your home is the amount of the purchase price you pay upfront.
The bigger your down payment, the less money you need to borrow.
On a $120,000 home, if you make a $10,000 down payment, then you’ll be borrowing $110,000 for your mortgage loan. The bigger your down payment, the less you need to borrow — and the lower your monthly mortgage payment.
How much money do you need for a down payment?
It depends. The amount you need to put down can vary by the type of mortgage loan you get. If you get a conventional mortgage, you should expect to make at least a 3% down payment. For example, on a $120,000 home, you should expect to make a $3,600 down payment. If you qualify, special first-time homebuyer programs offer mortgage loans with little or no money down.
Why is a 20% down payment considered such a magic number?
When a homeowner has at least 20% equity in their home, there are concrete benefits:
• It eliminates the monthly Private Mortgage Insurance (PMI) fee from their mortgage payment, saving them on average about $35 a month.
• It also means they’ll build additional equity faster — because they will have borrowed less, more of their monthly mortgage payment will go toward principal and less toward interest.
Tips for Saving Up
There’s no easy solution to saving up for a mortgage down payment. It involves taking a hard look at living expenses, eliminating unnecessary spending and disciplined saving.
Some key advice — be open to help from your family. It’s not unusual for parents and even grandparents to help out with the down payment on a first home.
Closing Costs and Cash Reserves
When you apply for a mortgage loan, your lender is going to consider how prepared you are to make a down payment and cover closing costs — and still have cash reserves available after you move into your new home.
Buying a home comes with additional one-time fees. There are lender closing costs and third-party closing costs.
- Lender closing costs can include fees for document preparation, loan origination and tax services.
- Third-party closing costs can include fees for property appraisals, credit reports, flood certification, termite inspection, title search, title insurance and other items.
All told, closing costs can range anywhere from 3% to 10% of the purchase price of your new home. On a $120,000 home, therefore, you’ll need to anticipate closing costs ranging from $3,000 to $12,000.
The Loan Estimate & Closing Disclosure Statement
So how do you know exactly what your closing costs will be?
- Loan Estimate (LE): You’ll receive the LE once you qualify for a mortgage loan. It will list what your estimated closing costs will be for homes in your target price range.
- Closing Disclosure Statement: A few days before you close on your new home, you’ll receive a Closing Disclosure Statement, which will detail all of your closing costs. It should closely match your LE.
It’s true that some mortgage loan programs allow you to include closing costs in your loan amount. Just keep in mind the more you borrow, the higher your monthly mortgage payment will be.