How much of a down payment do I need to by a Denver home? Or, I don't have enough saved for a down payment yet. These are the two most common questions/statements I hear when starting to talk with potential home buyers. I am very surprised to hear that most potential buyers feel they need 20% down to buy a home when in fact, I would say 75% of the buyers I work with end up putting less than 20% down when they finally do buy their home.
The advantage of putting 20% down is that you don't have to pay a for mortgage insurance. Mortgage insurance is a fee that is added on to your monthly payment to help protect the lender until you have 20% equity built up in the property. While in theory this is a best practice, in reality, saving 20% for a home purchase isn't very realistic for most buyers, especially most first time buyers.
When I meet with buyers, the first thing I advise is that they meet with a lender to get pre-qualified and figure out how much they really need to put down in order to be in the payment bracket they want to be in. Most buyers are thrilled to know they can actually buy a home with as little as 3.5% down, though most do go with the 5% down option these days. Besides the obvious of not having to save as much, going with less down typically will get you the same interest rate, you will have money in savings to make improvements on your home and reserves just in case something happens, and honestly, putting more money down doesn't always make financial sense.
As an example, on a $300,000 home, with 20% down or $60,000, your payment would be $1,204 a month before taxes and insurance. With 10% down or $30,000, your payment would be $1,454 and with 5% down or $15,000, your payment would be $1,600 a month. While $400 a month is a big difference between 20% and 5% down, so is $60,000 verse $15,000.
With prices on the rise and interest rising too, you also have to look at the value of money over time. If you can get a loan for 4.5% today with 5% down verse waiting until you have saved enough to put 10% down with an interest rate of 5.25%, you can start to see the benefits buying now instead of waiting to save more for a downpayment.
There was an interesting study done recently that showed in which states buyers put the most money down. The national average is 16% and in Colorado it is 15% which is down 9% from 2011. To read more about the national averages, click here. Rates aren't going to go back down to the 3's like we got used to so now, more than ever, it is crucial to look at your long term goals and decide if now is the time to buy even if you don't have the down payment you thought may have originally needed. Working with a lender to create a game plan is crucial and I would be happy to put you in touch with the best in the business, just let me know.
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