If you’ve set your mind on buying your home instead of renting, there are a few important things to consider, such as your down payment.
When you’re buying a home, the difference between your loan amount and the purchase price is called the down payment. The typical down payment is 20%. If you have the resources, the single biggest advantage of a 20% down payment is that it can lead to an overall lower monthly payment. It may also open the door for more loan options and better interest rates. In addition, it can free you from the added cost of mortgage insurance or a secondary loan payment, which may be required if you don’t have 20% down.
In a nutshell, the more you put down, the less you have to spend each month in order to repay the loan.
Down payment sources
Down payments can come from a variety of sources, such as your checking, savings, and money market accounts, and even investment or brokerage accounts. But if that’s not an option for you, there may be other ways for you to obtain a 20% down payment so you don’t have to take on a second loan or mortgage insurance.
If this is your first home, you may be eligible to take a loan from your 401(k) or Individual Retirement Account (IRA). This works similar to a second home loan, in that regular payments are required but the monthly cost may be lower. But before you exercise this option, check in with your retirement plan administrator to see if you qualify for this type of loan and what the terms are.
Another way to bridge the 20% gap is through gifting. If a parent or family member is willing to assist you with your down payment, it may be an option worth considering. And like everything else, be sure to notify your lender.
Exploring your options for a 20% down payment is a good first step in your homebuying considerations. These blog posts may be good additional resources for your planning:
- How it works: Prequalification vs. preapproval
- Countdown to success: Managing your credit during the lending process
- How you can find the best interest rate
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