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Planning for a Home Down Payment

How much money should you save when preparing to buy a house?

Article: Planning for a Home Down Payment

Planning for a Home Down Payment
Buying a home is a milestone worth celebrating, but it takes planning and preparation before signing the closing documents to ensure the purchase doesn’t become more of a burden than a blessing. Proper planning involves determining how big of a down payment you need and saving money for that down payment. Here are some pointers to get you started.

Determining your down payment amount
Traditionally, the standard down payment lenders recommend for financing a house is 20 percent because it will allow the homeowner to avoid having to pay private mortgage insurance. PMI is an extra monthly payment that can cost 0.3% to 1.2% of the loan's principal balance. Banks charge PMI to borrowers who put down less than 20% to get some protection should the borrower stop making mortgage payments.

However, 20 percent is not necessarily required to buy a house if you’re willing to pay a little extra on your monthly bill due to PMI. You might qualify for a lower down payment depending on the type of loan and your credit history.

The many costs of buying a house
Keep in mind that a down payment isn’t the only cost you’ll be paying to obtain a house. Purchasing a house entails other fees that you might not have anticipated. Here are some of the most common fees:

  • Fees paid to the lender for the loan arrangement, such as the origination fee, application fee, and underwriting fee
  • Fees for title requirements, like title search and title insurance
  • Home inspection, survey and appraisal fees
  • Home insurance and property tax dues, which could go into your escrow account
  • Various processing, commission, and service fees

Some of these fees will be due on your closing date, while others will be due throughout the application process or right after closing. When you’re saving money, make sure you have enough in your financial accounts to cover these and any other unexpected costs.

Down payment when moving to a new house
Once you’ve outgrown your first home and plan on moving to a larger abode, you will still need to put a down payment on your next house. However, instead of paying out of pocket like you did for your first home’s down payment, you’ll likely be able to cover some or all of the down payment with the money you’ll make selling your first home.

Big or small down payment?
Choosing how much to put toward a down payment depends on your financial situation and what you think you can afford. A larger down payment could constrict your finances initially when you may need to spend that money on moving and home improvement costs, but it lowers the amount you’re mortgaging and translates to less paid in interest and insurance over the life of the loan. A smaller down payment leaves more funds in your account now but will cost you more over the course of the loan due to the higher principle.

Whichever amount you choose to contribute to a down payment on a house, make sure you start saving now to be in the best financial state when it comes times to seal the deal. Advantis offers a My First Home Savings account to help you save for the down payment on your first home.