When you buy a home, you’ll typically be required to make a down payment. This is an amount that you must pay up front, the day you buy the house.
It’s common for people to refer to down payments as a percentage. For example, if you buy a home for $300,000 and make a 10 percent down payment, the amount would be $30,000. That means you’d need a mortgage of $270,000 to cover the remainder of the home price.
20 percent would be $60,000, and you’d need a mortgage of $240,000. And a 5 percent down payment would be $15,000, and you’d need a $285,000 mortgage. For several reasons, the amount of your down payment has a direct impact on the cost of your mortgage. The first one is the most basic.
A lower down payment will increase the cost of your mortgage simply because you are borrowing more money to cover the price of the home. A 5 percent interest rate on a $285,000 mortgage results in higher total interest payments than that same rate on a $240,000 mortgage.
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Also, if you put down less than a 20 percent, you will most likely be required to get mortgage insurance, which protects the bank in the event you fail to make your payments.
Finally, since banks experience higher risk on mortgages with lower down payments, they tend to charge higher interest rates on such mortgages. This is why it’s important to compare current mortgage rates.
Bundle has a cool tool that helps you create a down payment target based on your individual situation.