It’s no secret that buying a house is a big financial commitment. In addition to the purchase price, there are also closing costs, repair costs, and ongoing maintenance costs to consider. One of the biggest upfront costs is the down payment.
The required down payment is usually determined by the type of mortgage you choose, but your financial situation and the type of property you’re buying (whether it’s your primary residence or an investment property, for example) can also affect how much you need to put down. For most people, the minimum down payment is 3% of the purchase price. However, if you’re buying an investment property or a second home, the minimum down payment increases to 20%.
How Much Should You Put Down?
While the minimum down payment is 3%, most experts agree that you should aim for 20% if you want to avoid paying private mortgage insurance (PMI). PMI is an insurance policy that protects the lender in case you default on your loan. If you put down less than 20%, most lenders will require you to pay PMI.
For example, let’s say you want to buy a $200,000 house. If you put down 3%, your down payment would be $6,000 and you would be required to pay PMI. However, if you put down 20%, your down payment would be $40,000 and you would not have to pay PMI.
The size of your down payment has a direct impact on whether or not you have to pay private mortgage insurance (PMI). If you can swing it, aim for a 20% down payment so that you can avoid this added expense. Remember, a larger down payment also means lower monthly payments and more equity in your home from day one.