Tuesday, 26 September 2017

How Much Money Should You Put Down On Your First Home?

Written by Posted On Wednesday, 13 September 2017 18:55

Nobody is a house-buying professional when they get their first home. But it would pay if they were. Home-buying isn’t as simple as making an offer, getting it accepted, and moving in on closing day. There are many opportunities to spend and save, many inspections to schedule and contracts to sign, and many opportunities to save yourself money down the road.

The down payment is one of the most important ways to save money over the long term, but it’s one that a large number of first time homeowners don’t think about too carefully. We’ll cover some of the most important considerations below. For other recommendations for this stage of life, check out this first time home buyer’s guide.

Paying the minimum possible amount for your down payment may sound like the best option, but there are some important considerations to make when potentially opting for this one. Of course, for some people this may be the only option. Government programs like FHA loans with bare-minimum down payments are the only way that some people get into a house at all. For these people, a small down payment is a great opportunity, but the same won’t necessarily be the case for people who could pay a little more.

One of the best aspects of a larger down payment is that it reduces the amount you’ll pay for the duration of your loan. Let’s say that you put down $30,000 instead of $20,000. Depending on the size of your mortgage, the difference in your monthly payments might be $200 or more. That’s extra money coming out of your paycheck each month. That’s money that you won’t be able to spend or save.

It also represents extra interest that you’ll pay over the lifetime of your loan. We all know that there is a portion of each mortgage payment that just goes to paying down the interest of the loan. It’s easy to forget about because interest, taxes, and principle are usually paid as one lump sum each month. However, over the many months it takes to pay off your loan, that interest portion adds up to tens of thousands of dollars. By decreasing the initial amount of your loan with a larger down payment, you’ll decrease the overall amount of interest you’ll pay, saving yourself bucketloads in the long term.

A larger down payment is also a good way to ensure that you don’t “go underwater” on your mortgage. If you put down 3.5% on your house, and the house drops in value 10% the next year because of a flood, then you will owe more on your home than this is worth. This isn’t a huge deal if you turn the tide and your home starts to gain value again, but the situation can be avoided if you simply make a larger initial payment, representing a greater stake of ownership equity in the house which will not be depleted by a market downturn.

There are more reasons to pay more on down payment, but these are some of the most 

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