A down payment is an initial payment made by a homebuyer with financing, generally ranging from 5 to 20 percent of the home’s value, according to the American Bankers Association (ABA) Foundation.
A down payment of 20 percent will save the expense of private mortgage insurance (PMI), which is often imposed on borrowers who finance more than 80 percent of their purchase, and can also result in a lower mortgage interest rate.
To grow your down payment to 20 percent, the ABA Foundation recommends:
Saving – Open a separate savings account strictly for your down payment. Setting these funds aside from other types of savings will reduce the chance you’ll draw from it in times of need.
Budgeting – Your down payment will depend on the amount you plan to spend on a home. Assess your current financial obligations to determine how much you can save each month toward the down payment. Consider that many obligations can be reduced or even eliminated.
Tracking – Keeps tabs on the discretionary income you spend—this can help pinpoint areas where you can spend less and save more.
Researching – You may be able to save more with a down payment assistance or other housing-related program. Discuss the options available in your area with your real estate professional.
Bear in mind a 20-percent down payment is not a necessity, and ultimately, your budget and savings will determine the percentage. Contact a real estate professional for further guidance.
Source: American Bankers Association (ABA)