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The All-Important Down Payment

Figure out how much house you can afford by calculating the down payment and the mortgage.

The All-Important Down Payment

Dollars and Sense

Don't apply for a mortgage and then start trying to scrape together a down payment. Have your down payment in place well before you apply.

Another very important factor in figuring out how much house you can afford is the down payment. A down payment is the amount of money you're required (or have available) to pay up front on a house. The rest of the payment for the house is financed through a mortgage. You're normally required to put down between 5 and 20 percent of the price of the home you want to buy, though some lenders will go as low as 3 percent. That's somewhere between $4,500 and $30,000 on a home that costs $150,000.

If you don't have the greatest credit record in the world, but you have a sizable down payment, many lenders will give you more serious consideration than you'd get without a substantial down payment. The bigger the down payment you make, the less your monthly mortgage payment will be. This can work in your favor in two ways:

  • You can lower your monthly payments and have more money to invest or to use for other purposes.
  • You could afford a more expensive house with a bigger down payment, because you'll be financing less of the cost of the home. If you buy a $100,000 home and make a $5,000 down payment, you have to finance $95,000. But if you make a $20,000 down payment on the same house, you'll be financing only $80,000.

The following tables show examples of how down payments and interest rates factor into determining how much house you can afford.

Monthly Payment on $100,000 Home—6.5% Interest Rate, Different Down Payments
Down Payment Amount15-Year Mortgage20-Year Mortgage30-Year Mortgage
$ 5,000$ 815$ 694$ 585
10,000 772 658 554
15,000 729 621 523
20,000 686 585 493

The interest rate isn't a factor in how much you need to borrow to buy the house. It's a factor in how much you'll have to pay for borrowing the money. With interest rates currently at historical lows, individuals can afford to purchase a great deal more house than ten years ago because the monthly repayment amount is so much lower than when interest rates are higher.

Monthly Payment on $100,000 Mortgage—Varying Interest Rates, Varying Mortgage Terms
15 year$ 857$ 1,014.27$ 1,200.17
20 year 731 899.73 1,101.09
25 year 660 839.20 804.63
30 year 616 1,053.23 1,028.62

If your mortgage application is turned down because you don't have enough of a down payment, you can either come up with more money or look for a less-expensive house. Hopefully, you've planned for your down payment and have enough money saved. If not, you'll want to accumulate money as quickly as possible.

Perhaps you could cut expenses to save more, or borrow from your 401 (k). You could consider withdrawing funds from your IRA or borrowing money from a relative. Or you may be able to find a mortgage insured by a government agency that requires no or little down payment.

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