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Down Payments Essentials: What you Should Know
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Preparing to purchase your first home or a new larger home takes a lot of work and consumes a lot of time, especially when it comes to the money. No one wants to overpay for a home they could have gotten for a less and no one wants to lose the perfect home because they didn’t offer enough, this is why it’s really important that you educate yourself about the whole process. The down payment is often considered one of the more complicated parts of the buying a house, people sometimes don’t realize that the down payment can be a very large amount of money. Down payments usually take a couple of years to save for, this shouldn’t worry you as having the right amount saved is one the best things you can do before you decide to purchase a house.
The down payment is typically a percentage of the loan you’ll need to buy the house. The down payment is only one of several things involved in the mortgage approval process but it is essential. Here is all the information you need to know about down payments.
The Cost of a Down Payment
Obviously the total amount of your down payment depends on many different variables including, your lender, your past financial history and the house you’ve chosen to buy. But, generally speaking the average home buyer can expect to pay 20% of the price of the house for their down payment. 20% might not seem like that much but we’re talking about 20% of the price of as house not 20% of a bill at a restaurant. Here’s an example: If you decide on a house that costs $300,000 then you’ll need $60,000 to put as a down payment. Most people don’t just have $60, 000 lying around and this is why it’s important to know what you can afford and start saving for it right away.
It’s also important to note that your bank or lender could require less than 20%, but then your interest could be higher. Furthermore, if you have more than 20% saved you should consider not putting it all into your down payment. It’s a better idea to have some extra money saved for an emergency fund just in case.
Why is a Down Payment Necessary?
A down payment might seem like an unnecessary annoyance that is simply there to cause you stress, but we assure you that it is a completely necessary evil and here’s way.
- Having the appropriate amount of money for a down payment shows your lender that you can afford to pay for a house and that you are financially responsible. If you’re unable to save enough money for a down payment then chances are you can’t afford a house.
- Your down payment will act as equity. You’ll be able to use this equity to get another loan, after you’ve purchased your home, for unforeseen expenses or renovations.
- Your down payment can affect the size of your mortgage and the size of your monthly payments. Technically if you put down more than 20% your monthly payments will be less. But don’t forget that it’s not always the best idea to put your entire savings into your down payment, having some extra savings to put aside in case of an emergency is always a good idea.
Saving for a Down Payment
Before you head to the bank for a mortgage and before you start looking for the perfect home you need to start saving. Saving is potentially the hardest part of the whole home buying process and can take years. The saving process will put strain on your personal finances and you’ll definitely need to make some changes in the way you spend your paycheques. There are endless ways to save money based on your current financial situation and your lifestyle. Here are a few ideas to help you get started.
- Put aside a certain percentage of each paycheque.
- Making a profit on the sale of your current home.
- Create a strict budget that you stick to for a year. A year might seem like a long time but you could potentially save all the money you need.
- Downsizing your car or your current home if you live in an apartment or condo.
- Skipping this year’s vacation and saving the money instead.
- Cutting back on all unnecessary spending.
- Eating out less and staying in more.
- Find a second job and turn a hobby into a second paying job.
- Put aside any tax returns that you get this year.
No matter how you decide to save money it’s important that you start as soon as possible and take it seriously, purchasing the home of your dreams depends greatly on how much you’re able to save. Moreover, implementing cut backs and good spending habits into your life before you buy a house is one of the best things you can do for yourself. Once you’ve bought a house the costs don’t end and your savings will start to drain.
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