As of July 2023, the average mortgage down payment for home purchases in the United States is $28,000. This figure has doubled from $24,474 in 2022 due to the rapid increase in home prices.
Such a high amount can be intimidating for first-time homebuyers. However, it helps you set realistic expectations when negotiating with mortgage lenders.
While there’s a median amount, several factors can still affect your mortgage down payment, potentially increasing or lowering the price.
This guide will discuss these factors to help you understand essential variables that determine mortgage down payments. We will also provide the advantages these requirements can bring.
Understanding Mortgage Down Payments
A down payment is the sum you pay upfront to secure a mortgage for a home purchase you can’t make in cash.
For example, if a house costs $350,000 and you make a 15 percent downpayment, you’ll pay a $52,500 down payment. Your mortgage balance then becomes $297,500, making homeownership inexpensive over time.
Benefits of Large Mortgage Down Payments
You can gain several benefits by putting more than the minimum mortgage down payment. These advantages include:
Lower monthly repayments
A larger down payment helps reduce your mortgage’s principal amount. It lowers your monthly repayments by paying a smaller sum over the loan’s duration.
Here’s a comparison:
- A: You pay 20 percent ($70,000) on a $350,000 house, leaving you with a $280,000 principal amount
- B: You pay five percent ($17,500), resulting in a $332,500 principal amount
When you have a 25-year loan with six percent interest, a 20 percent down payment results in an estimated $2,220.71 monthly repayments.
Conversely, a five-percent down payment results in an estimated $2,558.97 monthly repayments.
These estimates include taxes and insurance. However, the lower down payment still doesn’t have private mortgage insurance (PMI), which can inflate your repayments.
Reduced interest rates
Interest rate refers to the cost of borrowing money. By paying a higher down, you can decrease the amount of this charge over the mortgage’s duration because lenders see lower risks when you have more stake in the property.
Consider scenario A. Over the loan’s duration, you may pay less interest because you’re borrowing $70,000 less. This way, you can save on interest in your monthly repayments.
Faster home-equity building
Home equity is the value of your financial interest in your home. It is the property’s current market value minus any liens that are attached to it.
With a larger down payment, you can start with more home equity from day one. This benefit occurs because your loan-to-value ratio (LTV)—mortgage amount divided by the property’s value—decreases.
In other words, the higher your down payment, the more ownership you can take from the moment you buy the property. Additionally, you can borrow against your equity for home repairs and personal expenses.
Potentially avoid private mortgage insurance (PMI)
Private mortgage insurance (PMI) is mortgage insurance your lender might require you to buy if you make a down payment of less than 20 percent for a conventional loan. This condition protects the lender if you stop making monthly payments.
A 20 percent or larger down payment helps eliminate PMI, lowering your monthly repayments.
However, if you can’t make a 20 percent down payment, paying more—preferably more than five percent—is still a good idea to shorten your PMI payment duration.
More favorable loan terms
Since lenders consider borrowers with higher down payments low risk, they can provide more favorable loan terms. These terms include a lower annual percentage rate (APR), shorter repayment duration, and lower closing costs.
Minimum Mortgage Down Payments Based on Types of Loans
Lenders have different down payment requirements based on the loan type you’re applying for. Most homebuyers go for conventional loans, but there are other financing options.
Here are these loans’ minimum mortgage down payment requirements:
Conventional loans
Conventional loans are loans not part of a specific government program. They typically cost less but can be challenging to get. Lenders are usually strict about credit scores and down payments.
These loans allow a three percent down payment for first-time homebuyers while at least five percent for experienced ones.
Conventional loans have two types: conforming and non-conforming.
- Conforming – Has maximum loan amounts set by the government
- Non-conforming – Pricing, eligibility, and features vary because they are less standardized
Federal Housing Administration (FHA) loans
The Federal Housing Administration (FHA) regulates FHA loans. However, the FHA doesn’t directly lend the money—private lenders like SoFi do.
These loans have the following requirements:
- As low as 3.5 percent down payment
- Allows lower credit scores
- Maximum loan amount depending on your county
FHA loans can cost more for those with good credit and a 10 to 15 percent down payment. Meanwhile, they can be the cheapest option for those with lower credit and smaller down payments.
Remember that FHA loans require mortgage insurance.
Department of Veterans Affairs (VA) loans
Department of Veterans Affairs (VA) loans are home loans designed for veterans, service members, and eligible surviving spouses.
Some VA loans have no down payment and PMI, but not all lenders participate in these programs.
VA loans can also limit closing costs and allow you to prepay your mortgage without penalties. The VA can even offer assistance for temporary financial challenges.
However, interest rates could be higher, and most borrowers may pay between one and three percent of the VA loan funding fee.
U.S. Department of Agriculture (USDA) loans
U.S. Department of Agriculture (USDA) loans are ideal for low-income homebuyers who want to buy properties in rural areas. They offer zero down payments and often have lower rates than conventional mortgages.
USDA loans also don’t require you to pay for PMI. They are ideal for first-time homebuyers, but they must meet specific requirements.
Other Considerations
Your down payment is just one aspect of your mortgage. Here are other considerations when planning the amount for this upfront fee:
- Keep some funds – Avoid exhausting your savings for the down payment. You could deplete your emergency funds or end up house-poor
- Save for closing costs – It’s essential to have cash for closing costs—processing fees that complete the transaction. They are usually two to six percent of the property’s purchase price.
- Ongoing costs – It’s best to leave a cushion for potential maintenance and repairs, even if you buy a move-in-ready home.
- Research – Compare mortgage rates from different lenders to determine the best option. At the same time, consider down payment assistance for first-time homebuyers.
Be Informed
Understanding mortgage down payments helps you navigate the home-buying process smoothly. While a higher down payment often translates to more favorable loan terms, it’s just one factor in your mortgage costs.
As such, your down payment shouldn’t sacrifice your overall financial security. Maintaining a balance between homeownership costs and other financial obligations is crucial.
Adequate planning and research can equip you with the knowledge to make choices that align with your financial resources and home-buying goals.