You’ve heard it all before: renting a home is essentially throwing money down the drain. You can be subject to rent increases each year, and you won’t fully have the security and control of owning your own home. In the long run, owning a home is a better investment. Mortgage payments will be reliably stable throughout, and no landlord will be able to evict you.
But there’s one thing that makes potential homebuyers a little anxious: the idea of the first down payment on their mortgage loan. How much will it cost, and will it be something they can afford? In today’s blog, we’ll discuss everything you need to know about the down payment and how to afford it.
How Much Is the Down Payment?
Although it will grant you ownership of your home as opposed to renting, almost any home ownership process requires a mortgage loan. The mortgage loan allows the lender to take on the cost of the home while you can pay them back in monthly mortgage payments. The monthly mortgage payments are often comparable to rent payments as the mortgage is designed to be paid off over the process of decades; but the first down payment is typically somewhere between 3 and 5% of the total cost of the home at minimum.
That means that if you intend to buy a home that costs $225,000, your first down payment will be anywhere between $7,000-11,000. However, homebuyers can choose to put more down for their first down payment, as this may impact the cost of their monthly mortgage payments. Some homebuyers will put down as much as 20%, as putting down less than 20% might mean that you will be required to pay for private mortgage insurance.
Can You Get a Loan for Your Down Payment?
It might seem a bit convoluted to get a loan to cover a loan, but some homeowners might search for personal loans that can help them cover the down payment for their mortgage. This can sometimes be called a “piggyback loan.” They are available, but come with risks attached. For instance, another loan will add to your debt-to-income ratio, lowering your credit. This could make lenders feel reluctant to approve you, as you seem like more of a risk. These loans can also come with a higher interest rate that can even increase over the course of the loan.
How to Save So You Can Afford Your Down Payment
Set your budget for your home based on what you can afford. For instance, if you want to make a 10% down payment on a mortgage, try to look for homes with a list price that is ten times the down payment amount you’re willing to pay. If you find something slightly below, great. If you find something slightly above, your Realtor® may be able to negotiate for you. You can also attempt to downsize if you find that you can’t afford a down payment for the type of home you had in mind. Picking up a side gig such as pet sitting, ridesharing, and so on might help you to have a little more flexibility in what you can afford.
The important thing is to talk to your Realtor® about your budget so they can help you find a way to afford the home you want. Vsells & Associates has you covered. Contact us today to learn more about our real estate services or to get started searching for your dream home.