Homebuyers have a lot to consider when searching for a home and deciding how to finance it. Between lenders and loans, mortgages, interest rates and down payments, things can seem overwhelming.
Here are the most important things for homebuyers to keep in mind when settling on how much to lay down for their down payment.
Think about the future
Buying a home is a long-term investment. Though the excitement of relocating life to a new space can cause homebuyers to rush through the process, the financing of a home will significantly affect a homebuyer's fiscal future. In essence, the higher the down payment, the lower the associated mortgage costs will be, SmartAsset noted. But since many homebuyers are often just beginning to establish their careers, or are in positions of financial flux (still paying student loans, thinking of growing the family, etc.), it can be hard to commit to a hefty down payment right off the bat.
When establishing a down payment amount, homebuyers must remember not only to choose an option that is optimal for their current needs and finances, but one that will remain suitable and smart as financial change occurs within the household.
A lender's point of view
When purchasing a home, the lender's confidence and trust in a homebuyer is key to establishing a fair and optimal financing plan. Factors that can affect this relationship include credit, loan and debt history, as well as the amount of the home purchase covered by the down payment. A lender will have much more confidence in loaning money to buyers who have put down a solid down payment, according to The Balance.
A typical down payment that covers a good portion of the home would be 20 percent down. This means that homebuyers purchasing a $300,000 house would be paying $60,000 for their down payment. Though for many buyers this is a huge payment, lenders will rest easy knowing that a significant portion of the home has already been covered, and the future mortgage rate is relatively low, in the case that any financial problems were to come about for the buyer.
The catch with low down payments
It can be tempting to settle on a low down payment if the option is available. Homebuyers are often in the mindset that once the house is theirs, they will continue to make the investment work for them. Hope of a salary increase and more financial stability in the future may be the reasoning for those who choose lower down payments, but even the best-laid plans don't always take form.
A low down payment has the potential to leave a buyer between a rock and a hard place when mortgage rates remain high, along with spiked interests rates – a common catch of low down payments, NerdWallet explained. These high recurring payments, as opposed to just a high initial down payment, can result in the need for more loans and a poorer borrowing reputation.
These factors are some of the many for homebuyers to keep in mind when financing their new home.