Brewing that morning cup of joe at home, eating out less, working a few hours of overtime. We know the sacrifices required to save up for your dream home. But how much should you save for a down payment? That’s a question we often get asked by first-time homebuyers. At Equity Bank, we want you to understand how your down payment affects your mortgage, so that you feel comfortable knowing those sacrifices will be worth it.

Important Down Payment Numbers

Your down payment is a deposit that goes directly towards the purchase price of the home when you close on your mortgage. The more you put down, the less you will need to borrow, resulting in a smaller loan and lower monthly payment. Every loan and situation is unique but there are a few numbers to be aware of when planning for your down payment, namely 3.5% for FHA loans and 5% for conventional loans. These two percentages represent the minimum down payment required for each respective loan type.

The next number to consider is 20%. Private mortgage insurance (PMI) is usually required whenever a borower makes a down payment of less than 20% of their home loan. It remains on the loan until an 80% loan-to-value (LTV) ratio has been reached. Typically, PMI will add an annual loan premium of .3% - 1.2%, and therefore can increase your monthly payments. Don’t be afraid of this number – while decades ago this was the norm, today the majority of loans are originated with less than a 20% down payment.

Debt-to-Income Ratio

Sometimes a lender will require you to put down more than the minimum deposit required. Banks will check your debt-to-income ratio, by dividing your recurring debt by your monthly income. Generally, you want to keep this number below 43%, but the lower the ratio the better. If you do have a higher debt-to-income ratio, the lender may ask you to put down more money in order to shrink the overall monthly payment.

What Payment Works for You

It is important to understand the many ways that your down payment affects your loan when planning how much to save. In addition to directly impacting your monthly mortgage payments as well as the requirement for PMI, it also can affect your loan interest rate. A lender views this initial deposit as an investment in your home, so they may be able to offer you better terms with a larger down payment. Lenders will also review your down payment to help you determine the type of loan that works best for you, such as an adjustable-rate or fixed-rate mortgage. 

We recommend that you also examine your debt-to-income ratio when determining how much to save for your down payment. This will give you some insight to determine your approximate monthly mortgage payment. 

Life Happens at Home

A home is the place where moments become memories that are treasured for a lifetime. We take pride in our contribution to those moments by guiding you through the home buying process. Knowing how your down payment factors into your mortgage will bring you one step closer to making your dream home a reality.

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