By: Jerika P – i-Lead Realty Social Media Manager
According to the National Association of Realtors (2022), the U.S. median home price nationwide is $392,000. For the average American, this is a staggeringly large sum of money. Fortunately, most home buyers are not expected to pay the full asking price out of pocket when purchasing a home. Instead, homebuyers are expected to provide a down payment to make up a portion of the purchase price. Understanding down charges is essential to planning and financing a home purchase correctly.
What is a down payment?
The down payment is the amount of money a home buyer expects to pay out of pocket at the point of sale. Typically, the down payment is expressed as a percentage of the purchase price. For example, a buyer who could purchase a home for $300,000 and only had $30,000 in cash to spend would have a 10% down payment. In this situation, the lender who provided the home loan would provide a loan for the remaining $270,000.
Lenders require a minimum amount of down payment to reduce the amount of money they need to finance a loan, as the more money a borrower can put into a home, the less risk they take.
Aside from reducing a lender’s risk, the size of a down payment will also determine the type and cost of a mortgage. Generally, most lenders prefer down gains of 20% or more. Loans with a higher down payment are more likely to be approved and have lower interest rates.
Additionally, down payments will also impact a borrower’s monthly mortgage payments. A larger down payment means less than the borrower will owe for each monthly payment. This can be especially beneficial to borrowers who are on limited budgets. Furthermore, a sizeable down payment can assist when a buyer’s income-to-debt ratio is outside the parameters set by specific lenders.
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