You're ready to look for houses and have the perfect size and location in mind. But before you sign on the dotted line, you'll have to save for that down payment.
The bigger the down payment, the smaller your home loan payments will be, realtor.com noted. A large enough down payment could also help you avoid paying private mortgage insurance – an extra charge lenders may add to your mortgage bills each month in case you default on your loan. However, not all homebuyers will be able to put down a large sum of money when purchasing a home.
Depending on how much you expect your down payment to be, you should adjust your budget accordingly to ensure you secure the home you want and are able to fulfill your loan obligations.
Here are five steps to budget for a home down payment:
1. Find Out How Much Home You Can Afford
Your house hunting budget will determine how much of a down payment you will need. After finding out the highest price you are willing to spend for your new house, you can then begin to think about your down payment and subsequent mortgage.
Use a mortgage calculator, such as the one provided by Zillow, to calculate your potential monthly home loan payments. By knowing what your homebuying budget is based on your income and ability to afford mortgage payments, you have a better idea of what your down payment will total.
"A 20% down payment can waive private mortgage insurance."
2. Determine Your Down Payment
You could use this calculator to play around with numbers and see how a smaller or larger down payment could affect your mortgage payments. For example, if you purchase a home for $250,000 with a down payment of 20 percent, or $50,000, you could pay $1,271 each month. This is based on a 30-year fixed-rate mortgage with an interest rate of 4 percent. A 20 percent down payment can waive private mortgage insurance, according to Bank of America.
If you choose to have a lower down payment of 10 percent, your mortgage payments could increase. Instead of $50,000, your down payment will be $25,000, resulting in a monthly mortgage bill of $1,501 for the same loan term and interest rate.
3. Look at Your Loan Options and Down Payment Requirements
In the past, homebuyers believed a 20 percent down payment was the norm. Now, times have changed, and potential homeowners may qualify for a mortgage with as little as 3 percent down.
Besides a conventional loan, consider other mortgage options, such as a loan from the U.S. Federal Housing Administration. In the event you qualify, you could put down a smaller down payment. The trade-off is while you may pay more in interest over the life of the loan, your mortgage payments will be low each month, allowing you to spend your money on other expenses in your budget.
4. Revisit Your Existing Budget
Speaking of your budget, you may have to cut some expenditures to make room for saving toward your homebuying goal. Evaluate your current budget, and see whether you will have enough additional funds to meet your savings target. If you do not, consider spending categories that you could reduce, such as your budget for dining out or subscription services.
5. Calculate How Much You Will Have to Save Each Month
By knowing the down payment you will require, you can start saving each month. For example, if you plan on having a down payment of $25,000 for a $250,000 home, your household could save about $1,040 each month for two years. Saving the equivalent of a 3 percent down payment, or $7,500, is less intensive, costing $625 per month for 12 months.