Understanding down payments

Most mortgage lenders will require that you put down a certain amount of money upfront. This money, otherwise known as your down payment, is usually a certain percentage of the cost of the house you plan to buy. Most down payments are estimated to be between ten and twenty percent of the property’s cost. Borrowers who are considered to be especially high risk might have to put down even larger sums in order to obtain the loans they seek.

There are many people who don’t have tens of thousands of dollars to spare toward down payments. For these borrowers, there are specially designed loans. FHA loans and VA loans, for example, help borrowers buy houses with low down payments and low interest rates. Other loans with low down payments might charge higher interest rates.

If you can afford it, you might consider making a down payment that is higher than the lender’s minimum requirement. There are three reasons to do this. The first is that you will be able to purchase a bigger house. Mortgages typically have limits that are determined by your income. If you are borrowing up to that maximum limit, a person who makes a larger down payment can afford a more expensive house than a person who makes a smaller down payment.

The second reason is that you will build equity faster. Equity is a form of wealth. In other words, your house is an investment. The faster you pay for it, the more of an investment you have made.

The third reason to make a large down payment is that you will probably receive a lower interest rate. This will lower your monthly payment and reduce the overall cost of the loan.