Planning for your down payment
Plan for your down payment
Your down payment is an important step in your homebuying process.
Here are a few tips to help you understand what a down payment is and how it affects your mortgage.
Down payments 101
- A down payment is the money you pay at closing towards the cost of your new home.
- The down payment is applied to the purchase price of the home. So, if your home is $100,000 and your down payment is 20%, you'll pay $20,000 at closing. The remaining $80,000 is your loan balance.
- The larger the down payment, the smaller your loan and monthly payment.
- While 20% down isn't required for conventional loans, anything less could require you to pay Private Mortgage Insurance (PMI). PMI helps repay your lender if you don't pay your loan.
- Some loans allow qualified buyers to have a lower down payment. For example, a Federal Housing Administration (FHA) loan requires only 3.5% down, while a loan from the U.S. Department of Veterans Affairs (VA) may not require any down payment.
Build your savings
Build your savings, Side 2 of 2
Many buyers tap into savings for a down payment. To grow your savings, consider setting up automatic transfers from your checking account. It might surprise you how quickly small transfers can add up.
Downsize your lifestyle
Downsize your lifestyle, Side 2 of 2
Downsizing can help you save money for your down payment. Creating a monthly budget and tracking your spending can help you reduce expenses and potentially watch your balance grow.
The sale of your existing home
The sale of your existing home, Side 2 of 2
If you're not a first time homebuyer, chances are you have equity built in your existing home. Many homebuyers use the proceeds from the sale of their current home as down payment for their next home.
Down payment assistance programs
Borrow from your 401(k) or IRA
Borrow from your 401(k) or IRA, Side 2 of 2
You can withdraw from your retirement accounts to fund your down payment, but you may be subject to taxes and penalties. Consult a tax advisor for more information.
Financial gifts from relatives
Financial gifts from relatives, Side 2 of 2
A relative can give you and your spouse up to $14,000 each tax-free towards your down payment, but there may be restrictions based on loan amount and type. Consult a tax advisor to learn more.