What You Need to Know About Buying a Home
As a property management company that also helps those in the Raleigh area buy and sell homes, we often get asked about the best amount of money for a down payment. “Don’t I need a down payment to buy a home, or is that a thing of the past?” is something that always comes up when meeting with home buyers and an honest question that has multiple answers.
Coming up with the disposable income to put a down payment on a house is one of the hardest parts of the home buying journey. Saving money takes time, and a down payment has benefits in our current fast-paced real estate market. The optimal down payment amount will depend on your home buying goals and financial situation, so let’s take a look at what you need to know to make the right choice for you and your family.
What Is a Down Payment?
A down payment is a sum of money that you pay towards the purchase of a home. It is your contribution toward the purchase of the property and represents your initial ownership and commitment to the home. The lender (usually a bank) provides the rest of the amount to purchase the property.
Most lenders require some sort of down payment when purchasing a home because it offsets their overall risk regarding the mortgage loan. The more money you put down initially, the less risk the lender is taking if you default on the payments. However, there are some exceptions when it comes to down payments such as VA loans and USDA loans. These loans are backed by the government and usually do not require down payments.
Down Payment: Average Amount
According to Rocket Mortgage, the average person puts about 6% of the property’s total cost towards the down payment. What does that mean from a number’s point of view?
- If you were to purchase a home for $250,000, a down payment of 6% would be $15,000. That would mean that you place $15,000 of your own money towards the purchase of the home while the lender (most often a bank) supplies the rest.
So, why is it assumed that a 20% downpayment is needed when purchasing a home? The idea that home buyers need 20% down comes from the private mortgage insurance (PMI) requirement. This is a type of insurance that protects the lender if you were to default on your loan. However, depending on your loan type (USDA loan, VA Loan, FHA Loan), there are different minimum down payment requirements.
Benefits to a Larger Down Payment
There are some benefits to placing a larger down payment on a property (more than 6%-20%). When placing a sum larger than 20%, you will more than likely get a better mortgage rate and lower your upfront fees for the home. You will also have considerably more equity in your home and pay a lower monthly mortgage payment.
Want to Read More?
Take a look at additional blogs that may help with the home buying process.
- Home Buying Made Easy- 12 step plan for any home buyer
- Do I have to Get Pre-Approved Before Purchasing a Home?
- Who Pays Closing Costs? Things to know when selling/buying a home
- Who Pays the Realtor Commission?
At Oak City Properties, we have been helping those in the Raleigh area purchase and sell homes for years! We approach each property from both a professional and personal perspective, whether you are a first-time property owner or a seasoned investor.
We are intimately familiar with Raleigh’s real estate market, so we’re uniquely positioned to guide you through every aspect of the home buying and selling experience. If you are interested in learning more about our services or speak to our listing agents, give us a call at 919-232-9222 or send us a message.