How to Calculate Down Payments

A down payment is an initial lump sum of money that you submit when making a major purchase. If you can’t afford to pay for an item in full (like a house or car) you may put in a down payment to show the seller that you are serious about the purchase. In some cases, you may be able to control how much you put in for a down payment. Follow this guide to learn more about budgeting for a new home.

First, calculate how much you need.

The cost of a down payment varies depending on your personal financial situation. There are some first-time homebuyer programs that allow you to put in a down payment of 3.5% or less. Check out the loan program by the Federal Housing Administration (FHA) to learn more. The goal of these programs is to increase the number of buyers in the market and help new buyers build up their equity. If you get an FHA loan, you may need mortgage insurance because of your low down payment amount.

Before you start looking at homes, explore different loan options. You might be able to put down a smaller amount of money if you buy as a veteran or opt to live in a rural area.

In some housing markets, like those with a low home inventory, you may need to increase your down payment amount when you bid on a house. This shows sellers that you have more cash and are more likely to get a conventional loan. Sellers want to see high down payments because it decreases the risk of accepting your home loan bid.

Once you have an idea of the down payment you can afford, you can move on to calculating your mortgage and the purchase price you can look for.

Next, evaluate how much house you can afford.

Once you have an idea of how much money you can put down, consider what size house you can afford. The larger your down payment, the bigger the home you can likely buy. For example, if you secure an FHA loan with $7,000 down, you might only be able to afford a home purchase price of around $200,000.

Just because you have a large lump sum doesn’t mean you should put it all into your down payment. You may want to save some of your money to cover your closing costs and additional living expenses. For example, if you have $50,000 in your bank, you might want to invest only $25,000. This will make sure you have enough money if there is an emergency and you need fast cash.

Your monthly mortgage payment also includes interest to your lender. Your interest rate depends on your credit score and other factors like the national economy. This is why two homes that sell for the same price and the same amount down can have different interest rates and monthly payments.

There are multiple tools online that can help you decide what size house to buy. You may accept a higher monthly payment and bigger mortgage loan but can enjoy the peace of mind of keeping a nest egg in your bank account.

Factor in your homeowners’ insurance and taxes

As a homeowner, you are also responsible for paying taxes on personal property and protecting your space with homeowners insurance. Request multiple home insurance quotes to see how much you can expect to pay for coverage. You might also need flood insurance if you live by the water.

Your insurance agent might be able to work with your lender to combine your costs into one monthly payment. This can also help you budget for home expenses. Make sure your homeowner’s insurance includes liability coverage, your home’s replacement cost, and your personal belongings. This will help you in the event of a natural disaster.

Look for home insurance compare tools online to learn about different homeowners insurance firms in your area to find the best rate for your needs.

The down payment is just the first part of your budgeting process as a homeowner. You also need to consider the home insurance costs and repairs needed to your personal property. Whether you are seeking an FHA loan or a conventional loan, do the math first to make sure you get the right loan amount for your needs.