Don’t show up to the race without your shoes.

September 2, 2016

Figure out your down payment before looking for a new home.  

With the Fall season approaching and open houses on the rise, you may be considering your options for buying a home. While there are many considerations with making such a large purchase, today’s let’s figure on planning for the down payment.

Before you scan the real estate section next Saturday morning, be sure to consider what amount you can afford to put down on a new home. The general rule of thumb is 20% of the market price (ie: $40,000 down on a $200,000 home); however, depending on where you live (Boston versus Omaha), your cost of living and home prices may seem “reasonable” or like a huge mountain to climb.

The process of pre-qualification will help with understanding what you can afford and what lenders may approved for you. The important thing to know about the down payment now is that it will affect your overall cost of borrowing and future monthly payments.

Borrowing costs: For starters, making a larger down payment will typically lower the risk of a loan. Lenders will see this as a good sign, have confidence you will make your payments on time, and therefore, potentially reduce your overall cost (see below). In many cases, making a larger than required down payment can put you in position for a lower interest rate on the borrowed amount.

Monthly payment: Let’s revisit that 20% mentioned earlier – generally speaking if you have 20% for the down payment, you can avoid what’s called PMI or primary mortgage insurance. This insurance policy is used to protect the lender from losing money should you end up defaulting on the loan. More good news: the larger the down payment, the lower your future payments, all things considered. This flexibility gives you the option of putting more toward the principal, if and when you are able, and pay your mortgage off sooner. (Read about Installment Accounts here.)

Don’t forget that there are multiple factors to consider when purchasing your new home. The down payment is only one piece of the puzzle. Get Organized and review your overall financial plan before jumping into the housing market. It could save you a lot of time, energy, and money down the road.