If you’re thinking about buying a house, you will have plenty of food for thought. In addition to finding the right house for your needs, you’ll need to figure out how to finance it. A down payment is part of that equation. What is the average down payment on a house in America? What percentage of their total home loan do most American homebuyers put down? Is it better to dive into homeownership with a small down payment or wait until you’ve saved up a larger sum? Exploring these questions can help you make better decisions as you navigate the path to homeownership.
The Average Down Payment on a House
If you’re under the impression that you’ll need a down payment of at least 20 percent to purchase a home, you aren’t alone. As Realtor Magazine reports, nearly 40 percent of people who do not own homes believe that 20 percent down is a must. Roughly 25 percent think that a down payment between 15 and 20 percent is necessary, and 22 percent insist that putting between 10 and 14 percent down is required. Who is right? What is the average down payment on a house?
In actuality, the average down payment on a house in 2016 was 11 percent. For borrowers under the age of 35, the average down payment was even smaller: 8 percent. In fact, 16 percent of those under the age of 35 who purchased a house in 2016 put nothing down.
So although 20 percent might be a figure that gets tossed around a lot when down payments are being discussed, there are many loan programs that allow aspiring homebuyers to become homeowners with little or no down payment if they have a fair credit score. In fact, Realtor.com reports that putting down 5 percent on a home in a typical American town could mean scraping together as little as $3,500. This raises another question: Is it better to make a big down payment or a small one?
The Benefits of a Bigger Down Payment
While a big down payment may not be required to secure a suitable mortgage these days, there are advantages to putting down a substantial one if you are able to do so. NerdWallet offers several good reasons for putting down at least 20 percent:
- Your monthly mortgage payment will be lower.
- You’ll build equity faster.
- You’ll normally be offered a lower interest rate. A lower interest rate means that it costs you less to borrow money, so the total cost of your loan will be lower.
- You won’t have to pay for private mortgage insurance, which will further reduce your monthly payment.
- You’ll be seen as a lower risk, so lenders will be more likely to compete for your business, which can result in a better deal for you.
The Advantages of a Smaller Down Payment
While making a substantial down payment does have its benefits, smaller down payments also offer advantages that many savvy homebuyers appreciate. As Fortune indicates, there are a few reasons why keeping your down payment small can work in your favor:
- Today’s low interest rates mean that carrying mortgage debt isn’t as burdensome as it might have been in the past.
- Because you won’t need to save as much, you may be able to buy a home and start building equity sooner.
- Dedicating less of your resources to your down payment reduces the opportunity cost of owning a home. You can use the money that you don’t put down to fund other, better-paying investments, pay for home improvements that increase your property value, save for retirement, travel, or pursue additional education.
- You’ll have less financial stress if you retain more of your resources for life’s unexpected events.
Determining the Down Payment That’s Right for You
Both large down payments and smaller ones come with pros and cons. How do you determine how much of a down payment you should make? The answer depends on your financial goals and circumstances. To determine the down payment that’s best for you, the Consumer Financial Protection Bureau recommends considering two things:
- How much can you afford? Your down payment isn’t the only expense on the horizon. You’ll also have closing costs and other expenditures. Plus, you’ll need to retain at least some of your savings for an emergency fund so that you can deal with any unexpected expenses that arise. Experts generally suggest having at least three months of living expenses tucked away for a rainy day.
- How does your down payment impact your mortgage options? Look at the home loan possibilities available and explore the effect of various down payment amounts.
Would you like to learn more about down payments and mortgage options? Contact PrimeLending today if you live in the Kansas City area. Our committed team will help you navigate the home-hunting process so that you can purchase the home of your dreams. At our branches located throughout Kansas City, we can help you explore our wide variety of loan products and programs. Plus, PrimeLending utilizes delegated underwriting, local appraisers, and cutting-edge technology to accelerate the underwriting and closing processes, and we’re more than happy to navigate you through the process of buying your first home. When you’re ready to get started, please give us a call at 844-701-5626.