How Much Do You Need to Save for a Down Payment?

While money remains difficult to find in our current economic state, it’s not impossible to find.  And, if you can save up money for a down payment, it turns out a down payment provides great long-term savings.

But, before you learn the advantages of making a down payment, take a minute to learn what a Utah mortgage broker may be looking for in a down payment.

Because of the real estate bubble bursting in 2007, most companies have tightened their lending standards.  Prior to 2007, just about anyone who wanted a mortgage in Utah could receive one, but now you typically need a credit score of 590 or higher to even be considered for a mortgage.

In the past, Utah mortgage companies would allow you to not make any down payment at all, and while that is still possible, most typically will require you to save up 20% of your future home’s purchase price for a down payment.

In some cases, you can get away with 10%, and in some very rare cases, you may make no down payment at all.  FHA loans require just a 3.5% down payment!

Advantages of Larger Down Payments

While you may only be able to save up just a smaller amount for a down payment, the best long-term choice is to make a 20% down payment.  Here’s why:

1. Everyone wants cash!  Typically, the sellers of the home you’re considering are more likely to sell their home to you if you provide a substantial down payment.  Also, if you’re looking to negotiate yourself a reduced purchase price, a significant down payment becomes a powerful bargaining tool.
2. When applying for a Utah mortgage loan, lenders will give you the best terms and interest rates if you are able to provide a 20% down payment.  Lenders know the risk of default substantially decreases as larger down payments are provided.  If you have a good credit score and income, you are assuring yourself of the best terms and interest rates available.
3. You’ll save a ton of money in interest in the long run.  If you buy a home for the average price of $220,000 at a 5% interest rate and make a 20% down payment of $44,000, you’ll save yourself nearly $36,000 in interest over the life of a 30-year fixed-rate mortgage!
4. You give yourself instant equity in the home!  Let’s say you are able to put $44,000 down towards your home right away.  Any mortgage company allows you to take out home equity lines of credit (HELOCs, which are loans) against equity you have built up in your home.  HELOCs are awesome because they typically come with a very low interest rate, and you can use a HELOC for almost any reason.  Now, you have a nice little security cushion of $44,000 built up just in cash a financial catastrophe arises!
5. Monthly payments decrease.  Let’s say you put $44,000 down towards your home when you first purchased it.  Your monthly payment would be $944.  Now, let’s say you made no down payment at all.  Your monthly mortgage payment would be $1,181.  The difference between the two payments is $240, and over the course of a year, that amounts to $2,880.  Making a down payment now will also help you begin saving money now.

If You Can Do It, Making a 20% Down Payment Makes a Ton of Sense!

Understandably, many, and perhaps most, American families would have a difficult time saving up a 20% down payment in this economy.  But if you can do it, you’ve just learned reasons why making a down payment will help you both now and in the long run!