Realtor.com/Getty Images
The traditional down payment of 20% isn’t the norm anymore as people are finding other options to finance, making homeownership more accessible.
Tezerae Herbert, a real estate agent in Frisco, TX, explains most loans require a 3%-5% down payment—which is about $12,000-$20,000 on a $400,000 home.
Herbert shared in a Facebook post outlining what a 6% down payment is on the cost of the following homes:
- Home price: $200,000; cash needed: $12,000
- Home price: $300,000; cash needed: $18,000
- Home price: $400,000; cash needed: $24,000
- Home price: $500,000; cash needed: $30,000
- Home price: $600,000; cash needed: $36,000
- Home price: $700,000; cash needed: $42,000
- Home price: $800,000; cash needed: $64,000
But there’s a catch. “Your down payment affects your monthly payment,” explains Herbert. “A higher loan amount equals a higher monthly cost.”
The average down payment is about 7%, says Herbert. “But there’s not a ‘right’ amount. It depends on. your savings, income, and goals.”
Knowing the different types of financing will help you budget what you’ll need to make your monthly payments.
“Run the numbers on a mortgage calculator to see what fits your budget,” suggests Herbert. “Or skip the guessing and talk to a lender.”
Types of home loans
There are different types of mortgage loans to help meet a person’s financial situation. The qualifications will vary depending on the amount of the loan and whether it’s part of a government program.
A fixed-rate mortgage will guarantee your interest rate is set for the life of the loan, which is usually 15 or 30 years. The advantages are your mortgage payment will remain the same every month and it’s possible to lock-in a low rate. The disadvantages are you’ll pay more interest over the life of the loan; if interest rates go down, you will not be able to take advantage of it unless you refinance.
An adjustable-rate mortgage means your interest rate and your monthly payments will change. The pros are there’s usually an initial low interest rate and you could pay less over time if mortgage rates fall. But the risks include a higher monthly payment if interest rates rise after your initial rate expires. Plus, it’s harder to budget if rates rise.
There are conventional mortgages which are offered by private banks. The two kinds are conforming and nonconforming (also known as jumbo loans). Conforming loans need to meet certain income requirements and down payment requirements that allow them to be resold to government businesses, like Fannie Mae and Freddie Mac.
The pros to this: You can put as little as 3%-5% down, but the cons include having to pay PMI (private mortgage insurance) if putting less than 20% down, and you need to meet a minimum credit score—usually 620.
A jumbo loan is a type of nonconforming conventional loan that allows a homebuyer to finance a more expensive property. The cons to this include a larger minimum down payment, higher closing costs, and a higher credit score to low-debt ratio.
There are also government-backed loans which are insured by federal agencies, but you must meet the criteria.
- FHA loan: This is for first-time homebuyers with a lower credit score and small down payment. There are loan limits to this type of loan, and it comes with higher mortgage insurance premiums.
- VA loan: This is backed by the Veterans Affairs Department and is available for those who have served or are serving in the U.S. military. Spouses may also qualify. No down payment or mortgage insurance is needed, and it can only be used for a primary home.
- USDA loan: This loan is backed by the U.S. Department of Agriculture and is geared toward low-income borrowers buying a primary residence in suburban or rural areas.
Current mortgage interest rates on a 30-year fixed rate home loan is 6.72% for the week ending July 31, according to Freddie Mac.
It’s best to compare mortgage companies and work with a mortgage consultant to decide the best loan for your financial situation.