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How Big Should My Down Payment Be?
- Real Estate Tips
- March 7, 2023
Is a Big Down Payment Necessary to Buy a House?
If you’re a first-time buyer, you may have heard how important it is to make a down payment for a house. In case you don’t know, a down payment is a percentage of the total home price you pay out of pocket before you finance the rest with a mortgage. But how much should you put in for a down payment? Should you spend a lot of money on that payment? If so, you may wonder, “How big should my down payment be?”
Although many lenders require homebuyers to put a big down payment of 20% on homes, you don’t necessarily have to do that. In fact, you could spend about 6% to 7% of the home price! The amount you should spend for a down payment depends on your lender, mortgage, and the type of house you want. However, if you make a big down payment, like a 20% down payment, you could decrease your loan amount and reduce your monthly mortgage payments. Bear in mind that there isn’t a specific amount to put down, but a total above 20% could work in your favor!
While you’re not obligated to pay a large amount of cash, you could benefit from making a large down payment. Keep reading to learn more about the perks of a big down payment.
What are the Benefits of Making a Large Down Payment of 20%?
If you talk to any Real Estate Agent in Encinitas, you might often hear how it’s wise to make a 20% down payment on your house. Not only can a big down payment of that size help reduce your loan amount and mortgage payments, but there are other advantages as well, including:
- Lower Mortgage Rates and Premiums: Lenders like seeing big down payments because it lowers the risk you pose to them. The more money you put down on the payment, the less you’ll have to pay in principal and interest.
- Have More Equity in Your Home: Be aware that home equity is your house’s value minus the amount you owe on the mortgage. That means your house’s equity is the extent to which your home is an asset rather than a debt. So the more equity your house has, the more money you can obtain.
- Lower Debt-to-Income Ratio (DTI): If you have a low debt-to-income ratio, you may have more borrowing power in the future. A debt-to-income ratio, or DTI, is simply the percentage of your monthly gross income that goes toward paying debts. So if you have a high DTI, you may not apply for other loans or credit if needed. But, if you make a big down payment, you could keep your DTI at a sustainable rate that can allow you to take out other loans!
- A Better Mortgage Rate: Besides having lower mortgage rates, you could also have favorable loan terms if you make a big down payment. The reason why is that lenders may see you as less of a risk and may reward you with terms that work better for you.
It’s important to note that a big down payment is recommendable if you have the money. If you don’t have enough cash to make a large installment, you may want to stick with making a small down payment. Remember, a 6% to 7% down payment works fine, as you could pay the total home price later with time. Talk to a Realtor in Encinitas for advice on what you should do in your situation.
Where Can I Find a Realtor in Encinitas?
Contact Realtor Linda Moore for more information about the down payments, homes for sale, and Encinitas!