How Big A Down Payment On A Home Should You Make?

Everyone knows they need a down payment to purchase a home. But how big of a down payment should you make?

The median sales price for a newly built home was $299,400 as of September 2019. A 20% down payment would require the buyer to put down $59,880. With a 5% down payment, that declines to $14,970, more palatable to many would-be home buyers. In fact, the median down payment for first-time buyers was 6% in 2019, down from 7% in 2018.

There are ramifications for putting less than 20% down on your home purchase. Before you can determine how much you should offer up, you have to understand the implications it will have over the life of your loan.

MyFi Without YHS

There are several factors to consider when planning for a down payment on a home:

Loan Type: Different home loan programs require different down payments.
PMI: For down payments of less than 20%, a borrower must pay for Private Mortgage Insurance.
Interest Rate: The size of the down payment can affect the loan’s interest rate.
Savings & Budget: A larger down payment of course requires more cash at closing. It also lowers the monthly mortgage payment as it reduces the amount borrowed.

MyFi with YHS tag

For home buyers who are in the position to put the 20% down, it still may not make sense if they are using money that is earning interest in an investment or savings account. By keeping the down payment under 20% they don’t have to tap their savings or invested money and as a result, are preserving their interest earnings investments. They won’t lose the positive benefits of compounding either, which happens when the earnings from an investment are reinvested.

MyFi with YHS tag

On the flip side, that 20% down payment may be necessary if you are shopping in a highly sought after neighborhood. With price wars still breaking out in pockets of the U.S. the bigger the down payment the stronger your offer will appear to sellers. After all, no one wants to agree to a sale price only to find out the would-be buyer isn’t eligible for the mortgage. A large down payment is a sign of strength and commitment to the sale process.