A down payment is a first step when you’re buying a house in Milwaukee. Here’s how much money do you usually need for it!
Buying a house isn’t necessarily scary, especially if you know the basics. This includes the knowledge of how large payment you need to make up front. Down payment scares a lot of people, especially when they aren’t aware of how will it impact their credit score or chances to purchase a dream property. Here’s everything you need to know.
What Is a Down Payment?
A down payment on a property is the payment a home buyer gives to the seller during the closing of the sale as a way to lock the deal. In most cases, the buyer pays the remaining money using a mortgage loan. The high money down is a proof for the lender that you’re serious about investing in a home purchase and that you’re committed to owning a said home and paying off your mortgage loan.
A down payment isn’t fixed-priced. It is calculated as a percentage of the amount you’re purchasing the property for. For example, if you’re purchasing a house for $300,000, and your money down is 10%, you’ll pay $30,000.
The size of a down payment will impact the total amount you’ll spend on the home. In most cases, the smaller the money down, the bigger the interest rate. This is why it’s always a good thing to spend as much money as you can on a down payment in Milwaukee. While you’ll pay more at that certain point, you’ll end up paying less once everything is completed.
This connection between the money down and interest rate helps lenders calculate the loan-to-value (LTV) ratio of the home. This, together with the debt-to-income (DTI) ratio and your credit score are the main factors your mortgage lender takes into the account before they approve the loan.
Are All Down Payments 20% of the Home Value?
It is a usual saying that the typical amount of money down is 20% of a home sale. This isn’t always the case, as you can get many loans with lower down payments, such as a FHA loan. Even some conventional bank loans can be approved with lower money downs, for example as low as 5%. However, there are many reasons why you’d want to make a 20% down payment. Here are some of them:
- You’ll end up paying less on a home
- You’ll get a lower mortgage interest rate
- You’ll have advantage over buyers who plan on placing less money down
- You won’t have to pay a Private Mortgage Insurance
How Big Should Your Down Payment Be?
The ideal size of the money down depends on many factors, including your own personal financial situation, your marital status, your age, your income, your credit score, and your savings. It is very rare for someone to pay the minimum or maximum amount on a money down. In fact, according to NAR, in 2016 the average down payment was 11%. People with low income usually place as low as 8%
When calculating how much you’ll need to save for a money down, you should take many factors into the account. One of a good ways to understand the cost is to use some online mortgage loan down payment calculators which can give you an idea of how much you should invest. Of course, online apps can make mistakes, so keep this in mind. The amount of money you get should be considered as just estimation.
Does the Type of Mortgage Influence the Size of a Down Payment?
The type of mortgage can influence the size of the money down. Of course, this mostly depends on the lender, but some types of mortgages require a similar amount of money be paid up front.
Conventional Mortgage – Most conventional mortgages, especially the 30-year fixed rate ones, require at least 5% down payment. However, as we’ve already mentioned, you should opt for paying a higher amount. Otherwise, you will end up paying a Private Mortgage Insurance and a higher interest rate, which means you’ll eventually end up spending much more on a property.
FHA Mortgage – If you opt for a government-backed mortgage, such as FHA mortgage, the minimum money down you can get is 3.5%. Even if you don’t go to the minimum, you can still expect a lower down payment than during a regular mortgage.
VA Loans and USDA Loans – Military members and veterans can get a home loan without money down. The same goes for home owners who want to purchase a property in rural areas.
Neither the USDA and the VA are lenders, but they will give their guarantees to a mortgage loan provider so you can get special conditions. Of course, if you’d like to, you can still place some money down even with these loans. This will make your overall payment lower.