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home  ⟩  down payment

How much should your down payment be?

That’s one of those questions more easily asked than answered, and one that depends on your target home price. How much your down payment should be is also not a question I can answer for you, but here’s some food for thought.

down-payment-inlineMy husband and I were 27 when we bought our house. We had no idea what we were doing. But motivated by our mutual dislike for paying rent for a crappy apartment, we dove in. With great luck and the recommendation of a friend, we had our real estate agent, Michael, for guidance. He helped us figure out what we could comfortably and conservatively afford, advising us not to strap ourselves with too great of a house payment. Michael helped us think things through with regard to the kind of house we wanted and where we could afford to live. He also helped us determine how much money we would need for a down payment.

Down payment considerations: the line in the sand

Michael laid out what our down payment options were: If we had enough for 20% down, we could finance without mortgage insurance; if we put less down, our lender would require us to get it.

Here are some other considerations Michael gave us.

20% or more down
+ The larger your down payment, the lower your monthly mortgage payment
+ Your lender will not require mortgage insurance — that’s one less expense each month
It may take you longer to save up your down payment
By the time you’ve saved up for a down payment, the home you want to buy may not be on the market or its price may have increased

So, for example, a 20% down payment on a home priced at $150,000 would be $30,000.

Less than 20% down
+ Your savings goal will be smaller, so you’ll need less time to reach it
+ You’ll be able to buy sooner than later
The smaller your down payment, the larger your monthly mortgage payment
Your lender will require FHA or private mortgage insurance — an additional expense included with your mortgage payment. (If you finance with private mortgage insurance, typically, you can cancel it once you have enough equity in your home.)

So, for example, a 10% down payment on a home priced at $150,000 would be $15,000; a 5% down payment would be $7,500.

Where we landed

It wasn’t long before we found The Little House of Our Dreams with a price tag in our range. We had been saving, but were nowhere near the amount we needed for 20% down. Our worry was that, in the time we’d need to save the difference, somebody else could buy it.

We scraped together a 10% down payment, becoming all too familiar with Kraft macaroni and cheese in the process. And we financed using private mortgage insurance.

After we had been in our home for four years, Michael sent us a letter reminding us that we may be able to cancel our mortgage insurance. So we did — and we reduced our mortgage payment doing so.