How Much Should I Put Down on a Home?

When you purchase a home, it is typical to put down some of your own money and borrow the remainder from your mortgage lender. But the amount you need to put down can vary from three to 20 percent of the purchase price of the home. What is the best down payment for you? Is more money down really better?

There are some loans available to qualified buyers that require nothing down, so why would you put down 20 percent in cash if putting zero or three percent down was an option?

Here are some of the downsides to putting little to nothing down on a home:

• Your monthly payment will be higher. The greater the down payment, the less you will have to borrow, and the lower your monthly payments will be.
  
  
• You will probably be required to pay for Private Mortgage Insurance (PMI). For any down payment of less than 20 percent of the asking price, PMI is required to protect the lender in case you default on the loan. This is insurance where you pay the monthly premium until you have 20 percent of your home’s value paid off (equity). Some loans require a set amount of years as well, even if you pay down your loan and get to the 20 percent equity mark, before they allow you to drop this insurance. This can amount to $85 to more than $100 per month tacked onto you mortgage payment.
  
  
• Sellers and banks may view you as a financially risky buyer. For sellers, your offer is less attractive because the deal could fall through due to trouble in obtaining financing for your loan. Putting down some cash also puts you in a better position of being a more trustworthy borrower for lenders, so it is easier to get a loan. The larger your down payment, the more banks will be willing to loan you.
  
  
• You may get a higher interest rate. If you have a very small down payment - for example, five percent or less - you may only be eligible for select types of mortgages that may charge more in interest.

There are more than 2,000 down payment assistance programs nationwide that can drastically reduce the amount of money buyers need in hand in order to purchase a home. While this could mean the difference between being able to buy or not, you should always weigh the pros versus the cons associated with a low or zero down payment option. If buying is still a priority, talk to your lender about all the loan programs available and determine if you qualify.

Have more questions about financing your home? Check out our article about getting a mortgage.