What is a down payment?
A down payment is an upfront payment from buyers when they are buying properties or assets they cannot afford to pay off on their own. These assets are usually expensive such as houses, cars, lands, etc. The downpayment will be in the form of a percentage of the total cost of the property. Buyers usually get mortgages or loans from money lenders to cover the remaining percentages.
How much should I use for my down payment?
There is no exact amount you need for the down payment. However, when you are buying a house, you will need to put down as much as possible to reduce interest charges. The standard down payment for conventional mortgages is 20% of the total cost of the property. Some homebuyers pay between 5-20% of the total cost of the property.
You could also pay as little as 3% on the down payment. This exception is made for buyers who use the Federal Housing Administration (FHA) Loan.
Benefits of putting down a big percentage
The money you put down will help to determine the interest charges on your mortgage. You can either get a Fixed-Rate Mortgage (FRM) where your rate will be constant for the lifetime of the mortgage; or, an Adjustable Rate Mortgage (ARM) where the rate changes throughout the lifetime of the mortgage.
Whichever mortgage you choose, your monthly rate will greatly be affected by your down payment. The more you put down the lesser your interest charges and therefore, your monthly payments.
For example, let’s assume you buy a house for $300,000 with a 20% down payment.This will leave you with a mortgage of $240,000. If you have a 3.5% interest on the mortgage, your interest charges on this mortgage will be $8400/year or $700 every month.
What would happen if I do not use a 20% down payment?
How much interest could you be paying if you did not put down 20%? Assuming that you only put down 5%, your new mortgage will be $285,000. By using the same interest rate of 3.5% your charges will be $9975 a year or $831.25 a month.
You can see that by increasing your down payment from 5% to 20%; you reduce your monthly interest charges by $131.25 a month or $1575 a year.
