Probably the largest upfront expense in buying a home is the down payment. This is the portion of the purchase price a buyer pays upfront at closing. As a general rule of thumb, the more you pay down, the less you’ll wind up paying in fees and interest over the life of the loan. But there are conditions that make paying less down a better option. To help you make the right down payment decision, we offer these tips on how to determine how much to put down on your new house in Carmel.
Calculate Your Budget
The first step in determining how much to put down on your new house in Carmel is to calculate your budget – how much you can actually afford to put down based on several factors. Certainly, the size of the monthly mortgage payments will play a big role here, but there are many other expenses that should be factored in, such as insurance, property taxes, HOA fees, and so on.
An excellent starting point is pre-approval. Once you are pre-approved for a mortgage loan, you’ll know how much you can borrow, which plays a large part in how much you can and should put down.
When it comes to determining how much to put down on your new house in Carmel, industry pros caution against buying more home than you can actually afford. If you do, the amount you can pay down typically decreases.
“As a general guideline, many prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. For example, if you earn $100,000 per year, you can afford a house between $200,000 and $250,000.. . . If your monthly mortgage payment and other monthly debts exceed 43% of your gross monthly income, you might have trouble repaying your loan if times get tight. In other words, be cautious about buying more house than you can reasonably afford.”
Understand When a Bigger Down Payment Is and Is Not Better
A bigger down payment isn’t always better. So when trying to figure out how much to put down on your new house in Carmel, you need to determine whether bigger or smaller better fits your financial situation, goals, and needs.
“A large down payment helps you afford more house with the same payment. Say a buyer wants to spend $1,000 per month for principal, interest, and mortgage insurance (when required). Making a 20% down payment instead of a 3% down payment raises their home buying budget by over$100,000 – all while maintaining the same monthly payment. . . .Even though a large down payment can help you afford more, by no means should home buyers use their last dollar to stretch their down payment level.”
So sometimes it’s better for some buyers to put less down on that new home.
A larger down payment can put you at financial risk. You may have to dip too deeply into your reserve cash and so won’t have money for any emergencies that arise, such as major home repairs or a new car when your old one gives up the ghost.
In addition, a larger down payment can lower the rate of return on your new home. Typically, the less you put down, the larger the return on your investment because you have less cash tied up in it.
Know How the Down Payment Will Affect Your Loan-to-Value Ratio
Knowing how the down payment will affect your loan-to-value(LTV) ratio is also key in determining how much to put down on your new house in Carmel.
A lower LTV ratio is usually better for most borrowers. Lenders use it to assess their risk, so a lower ratio means you will pay lower interest rates and may avoid other costs such as private mortgage insurance. And the more you pay down, the lower your LTV ratio.
This is a scenario you should certainly consider to figure out what to put down on your new house in Carmel. “A lower LTV ratio presents less risk to lenders. Why? You’re starting out with more equity in your home, which means you have a higher stake in your property relative to the outstanding loan balance. In short, lenders assume you’ll be less likely to default on your mortgage. If you do fall behind on your mortgage and a lender has to foreclose on your home, they’re more likely to resell it and recoup most of the loan value if the LTV ratio is lower.”
Consider How It Impacts Your Offer
How much you decide to put down on your new house in Carmel will also impact your offer. An offer that includes a larger down payment is usually more attractive because it tells a seller that you have more skin in the game.
“A higher down payment.” experts say, “can indicate to a seller that you have enough cash on hand and solid finances to get a final loan approval (and get to the closing table) without a hitch. Also, a higher down payment could beat out other offers that ask for sellers to pay closing costs or offer below the asking price. Someone with a sizable down payment is unlikely to request such assistance, and sellers are more likely to work with a buyer who has the money and motivation to see the purchase through with minimal haggling.”
Don’t Forget Low Down Payment Programs
In years past, it was pretty standard to put 20% down on a home. But that has changed today, especially for first-time buyers.
With home prices soaring in many markets and inflation outstripping wage increases, more and more buyers are finding it more difficult to come up with a large down payment. That’s why today there are several low (and even no) down payment options. If you qualify, this can help you determine how much to put down.
Consult Your Agent
So how much should you put down? As we’ve shown, that depends on several things. So be sure to consult your local real estate agent because the same conditions don’t obtain in every local market. For expert help in determining how much to put down on your new house in Carmel, contact us today at 317.339.2259.