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What You Need To Know About Down Payments?

Buying a house as a primary residence or an investment property is a big financial commitment and in most cases require a lot of money upfront.

In this blog post we will discuss what is a down payment and everything one will need to know about it before buying their first home.

How Does Down Payments Work?

A down payment represents an amount of cash paid at the start of purchasing an asset. The amount of the down payment varies depending on a percentage of the purchase price.

If someone is purchasing the home as a primary resident then they may have the ability to put down as little as 3% of the purchase price for the down payment. However if they are planning to purchase a property as an investment then it is more common to put down at least 20% as the down payment.

The greater percentage of the purchase price someone puts down as a down payment will decrease their monthly mortgage payments. Depending on their current expenses and income, it may be better for them to put down more money in the beginning so their monthly mortgage payments are cheaper.

With that being said, if anyone needs any extra guidance on determining monthly mortgage payments they can use a mortgage calculator online for free.

What is Private Mortgage Insurance (PMI)?

If someone if buying a house as a primary resident and they don't have to 20% for a down payment, then there are loan options that will let them put down as little as 3% as mentioned before. However whenever they put down less than 20% as a down payment most lenders and financial institutions will require them to pay private mortgage insurance until they reach 20% in the property’s equity.

Since one doesn’t have enough capital to put down 20% upfront, private mortgage insurance is simply a way for financial institutions to mitigate risk by offering someone a home loan without at least 20% in equity. Typically private mortgage insurance it's only a few hundred dollars in addition to someone’s mortgage, insurance, and property taxes.

Closing Costs vs. Down Payment

Most people confuse down payments with closing costs. Closing costs are a complete separate arrangement of cost that is necessary when you are purchasing a home. It's important that you have additional Capital to afford these cost however it is not included within the down payment. Items that makeup the closing cost are origination and underwriting fees, the appraisal and an home inspection for the property.

What is Down Payment Assistance?

If someone is struggling to save up the necessary funds for a down payment on a home don't lose hope because there are programs to assist them. There are down payment assistance programs in every state across the US. Each state program has specific requirements and qualifications to be eligible for down payment assistance.

I recommend Googling your specific state and asking about its down payment assistance programs to see if you are able to apply.

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