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Down payments explained

Down Payments, Explained

There are plenty of things to consider as you prepare to embark on your home ownership journey, but chief among them is the down payment. In recent years, Americans have viewed saving enough for that initial payment as a significant obstacle to achieving their goal of owning a home.

We’re here to help demystify the down payment. What is it? How much or how little should you put down? When does your mortgage come into play?

What’s a down payment, anyway?

The down payment is the cash you pay the seller of your new home right off the bat out of your own pocket, and it’s usually expressed as a percentage of the total sale price of the home. That money, plus the amount of your mortgage loan (more on that in a minute), adds up to the total cost of the home. Buyers can generally put down between 3 percent and 20 percent of the purchase price. Your down payment will depend on the cost of the house you buy, and the percentage of that price that you are able to pay in cash upfront.

How much should I put down as a down payment?

The answer depends entirely on your financial situation. Real estate experts have long recommended 20 percent as ideal, though it’s not a requirement. The more money you can put down, the less you have to borrow. Your down payment also has an impact on your mortgage terms and rates. When you’re ready to buy or to determine how much you can afford to spend, consulting a mortgage calculator like this one from Mr. Cooper is a wise idea.

Where does a mortgage come in?

There are several types of home loans, and each typically requires a certain minimum down payment. A conventional loan, which is not backed by the federal government, typically requires a buyer to have put a minimum of 5 percent down on the sale price of the house. If you are able to put at least 20 percent down for a conventional loan, you generally won’t have to purchase mortgage insurance (PMI). However PMI, which protects lenders in case a borrow cannot meet his or her monthly obligations, is typically required of anyone who makes a down payment of less than 20 percent and increases monthly mortgage payments as an add-on expense.

Another type of mortgage is a government-backed Federal House Administration (FHA) loan, which can have a minimum down payment as low as 3.5 percent. This type of loan has flexible credit requirements and a down payment that many home buyers find more manageable— but requires both upfront mortgage insurance and monthly insurance.

Can someone answer the rest of my questions?

When it comes to mortgage financial goals, the team at Mr. Cooper believes that the more consumers know, the more they can achieve. Get in touch with a mortgage professional today to learn more about how we can help you.

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