How does a Down Payment Work When Buying A House?
Buying real estate is a huge deal. No matter what kind of real estate youâre looking at, itâs a big investment that requires careful financial planning. One of the most crucial (and often confusing) aspects of buying a house is the financing. How exactly does a down payment work when buying a house?
This post will break down how down payments work and help you figure out what you can actually afford as a first-time homebuyer.
How does a Down Payment Work When Buying A House?
IKYMI, this is the second post in a series of blog post intended to help simplify confusing âadultingâ topics. Read this post if youâve ever asked yourself âshould I buy a houseâ?
I hate that it feels like the âhigher upsâ want to make important subjects involving money, investing, saving, etc confusing. Itâs almost like they want us to be confused so we get frustrated and give up or give in.
I spent my college years studying finance & economics for that very reason. Fast forward to present day, I felt pretty pi$$ed off when we bought our first home because it felt like the entire process was being made so much more confusing and overwhelming than it needed to be.
So in addition to my social media and blog, I decided to get into real estate investing. Iâm using myself as the guinea pig, investing in property here in San Diego and learning more about different types of real estate, investments & the whole process. Sharing what I learn and making it easier for you guys to make power moves!
Before we jump into the big stuff, letâs take a quick intermission to relax and feel zenâŚ
WTF is a Down Payment?
Have you ever nodded your head and kind of agreed to understanding what a down payment is and how it works? Like, maybe you understand the general concept. But also kind of know youâre not entirely comfortable with the concept?
Well, a down payment is a percentage of the home’s purchase price that you pay upfront. Thatâs the basic definition. However much a home costs, youâre going to pay a percentage of it before jumping into a loan to pay the rest off.
The rest of the purchase price is then financed through a mortgage.
The size of your down payment, or amount you put down, determines how much you’ll need to borrow, your monthly mortgage payment, and the interest rate on your mortgage.
Here’s how down payments work:
- The Down Payment Percentage
The down payment percentage required for a home varies depending on the type of mortgage you choose and the lender’s requirements.
Generally, the down payment percentage youâll pay ranges from 3% to 20% of the home’s purchase price. A larger down payment can help you get a lower interest rate on your mortgage and lower your monthly mortgage payments.
Want a refresher on interest rates? Head to this post!
- The Down Payment Amount
To determine the down payment amount (aka dollar value), you’ll need to multiply the home’s purchase price by the down payment percentage.
For example, if the home’s purchase price is $200,000 and the down payment percentage is 10%, you’ll need to pay $20,000 as a down payment.
- Additional Costs
In addition to the down payment, there are other costs associated with buying a house that you need to factor in. These include closing costs, which typically range from 2% to 5% of the home’s purchase price and property taxes, which vary depending on the location of the property.
Now that you understand how a down payment works let’s chat about what you can actually affordâŚ
What Can I Afford?
- Determine Your Budget
Before you start looking at houses, determine your budget. This is important for the obvious reasons, but itâs also important so you donât end up feeling disappointed. Donât start your search looking outside of your budget, it will make you frustrated.
A general rule of thumb is that your monthly housing expenses, including mortgage payments, property taxes, and insurance, should not exceed 28% of your gross monthly income. It’s important to factor in all of your monthly expenses to determine how much you can afford to spend on housing.
- Calculate Your Down Payment
Once you’ve determined your budget, you can calculate how much you can afford to put down as a down payment. A larger down payment can help you get a lower interest rate on your mortgage and lower your monthly mortgage payments.
Take this into consideration when looking at home prices. By looking at properties on the lower end of your budget, youâll have a larger down payment available.
- Save Money for Your Down Payment
If you don’t have enough savings to make the down payment, it’s important to start saving as early as possible. You can also explore down payment assistance programs that can help first-time homebuyers with their down payment.
IF YOU FOUND THIS POST USEFUL OR INFORMATIVE, YOUâLL LOVE MY ADULTING NEWSLETTER! LIKE THIS BLOG, ITâS ALL ABOUT SIMPLIFYING THE CONFUSING âGROWN UP STUFFâ LIKE BUYING A HOUSE, SAVING MONEY, FIGURING OUT HOW TO CLEAN YOUR GUTTERS, BUYING LIGHT BULBS⌠YOU KNOW, THE âBORINGâ STUFF YOU DONâT REALLY WANT TO DO⌠BUT WEâRE MAKING IT EASY AND FUN LESS EXCRUCIATING.