How Much Should You Save for a Down Payment
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April 7, 2014

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accounting calculator over the hundred dollar bank notesEveryone knows that a down payment is a part of the home buying process, but determining how much money should be saved can seem overwhelming. There are many different  factors to deciding on how much to save for a down payment. Analyze each factor below to decide how much you should reasonably save for your upcoming home purchase.

Type of loan you want.

This can be the biggest indicator of how much money you need to save for your downpayment. You need to know what type of loan you are planning to apply for and what you are eligible for. All mortgage loans have a maximum loan to value that they are willing to loan against. Usually a downpayment of some sort is required. Figure out how much your lender is requiring in a downpayment.

Furthermore, you may be able to find a loan that only requires a 5% downpayment, but you want to avoid Private Mortgage Insurance. Typically, in order to avoid private mortgage insurance you’ll need to make a downpayment of 20%.

Amount of mortgage you can afford. 

Although you may know the percentage of a down payment you’ll need to save, you’ll need to figure out where you are taking that percentage from. A 5% downpayment varies greatly between a $250,000 mortgage and a $400,000 mortgage. Determine what type of monthly mortgage payment you can afford based on home price and calculate your percentage from that number.

Example:

  • You can comfortably afford a mortgage payment based on a $200,000 mortgage.
  • Your lender has a maximum loan to value of 95%. This requires a downpayment of 5%.

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