When it comes to buying a house, the more money you can put down on the purchase price, the less your mortgage loan will cost. Why? Because you will pay less in interest. This is true of any loan, regardless of how large a sum you are borrowing, and for this reason, it's important to save as much as you possibly can before making that big purchase.
The question is: How much should you save? That—and your resources, of course—will determine how long it will take to reach your goal.
Key Takeaways
- Experts say that 20% is the ideal amount to put down on a home or a car.
- It is possible to buy a house without a 20% down payment, but you will be responsible for paying PMI and added interest to your mortgage payment.
- Experts encourage potential homebuyers to stash enough cash to cover a down payment.
- Sticking to a budget may help you save over time for a down payment on a home or an automobile.
Differing Views on Loans and Down Payments
Many personal finance gurus believe that taking out a loan for any reason, even to buy a home, is not a good idea. This is because the amount of money you’ll pay over the life of the loan makes the asset you purchased way overpriced. Others argue that the responsible use of credit is healthy.
Whatever your opinion, even the experts agree that the more money you can put down, the more cost-effective the loan. And that means you have to save as much as possible.
A down payment on a house or condo can cost potential buyers anywhere from 5% to 20% of the purchase price.
Take home mortgages. Although you can put down as little as 3.5% with an FHA loan or 5% with some other loans, you will probably pay a higher interest rate because the lender sees you as a higher-risk borrower. That means the cost of the loan is unnecessarily higher.
Let’s say you buy a $200,000 home with a 4% interest rate; on a 30-year loan, you would pay more than $140,000 in interest alone. But most Americans cannot afford a home without a mortgage, and paying interest is just part of the deal. According to ATTOM Data Solutions, as of its Q3 2020 U.S. Residential Property Mortgage Origination Report, "lenders originated 1,050,624 residential purchase mortgages in Q3 2020."
Any home mortgage that doesn’t reach the 20% loan-to-value level will have private mortgage insurance (PMI) added to the monthly payment. That means that you will pay between .5% and 1% of the loan amount annually for this insurance. For this reason alone, it’s best to put at least 20% down for a mortgage, as a rule of thumb.
Auto Loans and Down Payments
The same principle is true for car loans. You don’t have to worry about PMI on an auto loan, but cars depreciate fast. If the loan stretches out too many years, you risk finding yourself owing more money on the loan than the car is worth.
Car gap insurance can help against that risk, but you're better off not putting yourself in that situation in the first place. That is why experts recommend at least a 20% down payment on an auto loan. If you can’t afford that large a down payment on the car you want, consider looking for a cheaper model to keep the cost of the loan within your price range.
Ways to Save for a Down Payment
A 20% down payment on a car loan or home mortgage is a large amount of cash, and for many households, it isn’t practical. Still, you should attempt to reach these levels. In the case of a car, the down payment doesn't necessarily have to be in cash. Dealers will often lower the price of a new car if you trade in your old automobile as part of the deal. Or you could sell your car privately to raise money.
The same is true for a mortgage. Selling your current home at a profit becomes the money you use for your down payment. Don’t take the first offer you receive if it’s below market value. Better to wait a little longer and get a fair sale price so your down payment is larger.
If you’ve barely saved anything, the hard truth might be that you need to slow down and be patient before making that big purchase. Create a budget for yourself that allows you to save as much as you can each month. Also, look through your home and see what you can sell to raise money. You may have more value than you think tied up in your belongings.
You also might consider taking a part-time job or doing freelance work to earn extra money to put aside for your purchase. To motivate yourself, spend some time calculating how much you could save over a year if you worked a second job.
The Bottom Line
One thing is certain: If you’re serious about making a big purchase in a financially responsible way, it’s going to take some radical action. Live as lean as possible and delay the purchase until you reach your financial goal.
Too many people purchase before they’re financially ready and create extra stress and problems for themselves. Slow down, save as much as you can and then make your dream purchase. You’ll be happy you waited.
FAQs
For some folks, the best option might be to find a middle ground between a minimal down payment and the traditional 20%. For instance, if you take out a FHA loan and put down 10%, your mortgage insurance will be cancelled after 11 years; otherwise, you'll continue paying it for the entirety of the loan.
How much of my savings should I use as a down payment? ›
For some folks, the best option might be to find a middle ground between a minimal down payment and the traditional 20%. For instance, if you take out a FHA loan and put down 10%, your mortgage insurance will be cancelled after 11 years; otherwise, you'll continue paying it for the entirety of the loan.
How best to save for a down payment? ›
- Set a goal for how much money to save.
- Tighten your budget.
- Save raises and windfalls.
- Earn extra money.
- Automate your savings.
- Keep your savings in the right account.
- Resist dipping into your other savings.
- See if you qualify for first-time home buyer assistance programs.
For those planning to purchase a home within the next 3 years, Fidelity suggests holding down payment cash in checking, regular savings, or high-yield savings accounts—or in cash-like investments such as money market funds or certificates of deposit (CDs) that will mature before you anticipate needing the money.
How important is a 20% down payment? ›
Benefits of a larger down payment
No PMI: Avoid private mortgage insurance with a 20% down payment on conventional loans. Immediate equity: A larger down payment means you start with more home equity, reducing your loan-to-value ratio. Lower DTI: A lower debt-to-income ratio may increase future borrowing capacity.
Can I afford a house on 70k a year? ›
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
How much money should you have leftover after down payment? ›
How much money should you have leftover after buying a house? After buying a home, the amount you have left will vary depending on your financial situation. However, it's a good idea to have at least three to six months of living expenses in reserve. That way, in case of an emergency, you can stay afloat financially.
Is it better to pay off house or keep money in savings? ›
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
Is it better to put more money down on a house or save money? ›
You can often secure better rates with a larger down payment, but you also need to understand how much you can afford. Paying too little for your down payment might cost more over time, while paying too much may drain your savings. A lender will look at your down payment and determine which mortgage is best.
Is it better to keep money in the bank or buy property? ›
Keeping your money in the bank is considered a low-risk investment strategy. Unlike investing in assets such as stocks or real estate, where the value can fluctuate significantly, bank deposits are generally stable and less susceptible to market volatility.
Higher costs: Your mortgage interest rate and loan costs could be higher if you put down less upfront. “It can increase the cost to the borrower when you put less than 20 percent down, as many loans are priced based on factors relating to risk,” says Scott Griffin, founder of Scott Griffin Financial in Los Angeles.
What is the 20 down payment on a $300 000 house? ›
A 20% down payment on a $300,000 house is a common preference for most mortgage lenders. Most mortgage lenders favor a $60,000 down payment for a $300,000 home because the risk when the homebuyer defaults on the monthly mortgage payments is lower. Homebuyers also benefit from a 20% down payment.
Is it better to put 5 down or 20? ›
Since you're assuming more of the financial risk, a 20% down payment puts you in a great spot to negotiate with your lender for a more favorable mortgage rate. A lower interest rate can save you thousands of dollars over the life of the loan.
How to avoid 20% down payment on investment property? ›
Yes, it is possible to purchase an investment property without paying a 20% down payment. By exploring alternative financing options such as seller financing or utilizing lines of credit or home equity through cash-out refinancing or HELOCs, you can reduce or eliminate the need for a large upfront payment.
Is a 3% down payment enough? ›
While a 3 percent down mortgage can make homeownership more accessible, it carries a few drawbacks. Because you'll be providing a deposit of less than 20 percent, lenders will require that you pay for private mortgage insurance, which increases the monthly mortgage payments.
How much to save for a down payment on a car? ›
How much should you put down on a car? A down payment between 10 to 20 percent of the vehicle price is the general recommendation. But if you can afford a larger down payment, you can save even more money on interest payments over the life of the loan.
How much to save for a $500,000 house? ›
Introduction to down payments
So, if your mortgage requires that you put down, say, 3%, the down payment needed for a $500K house would be $500,000 x 3% = $15,000. And a 20% down payment would require $100,000 ($500,000 x 20% = $100,000). You may be able to do those calculations in your head or using a calculator.
