Saving for Homeownership: What to Know About Down Payments

For many, purchasing a house is a long-term goal. If you are a first-time home buyer, you may need some guidance when buying a home in Florida.

Most begin by evaluating their financial wellness and look to secure a mortgage loan to finance their homeownership. This involves making an initial down payment and then paying off the loan through monthly payments over a set term.

Understanding the intricacies of a down payment is crucial, as it significantly impacts your mortgage terms and overall financial planning.

What is Included in a Down Payment?

A down payment is a percentage of the total asking price of a home. It is made upfront during closing and serves as an initial offer to finalize the purchase of a home.

The amount you're able to pay for the down payment will affect the remaining amount due and the monthly payments over the course of the mortgage.

A down payment is typically 3.5%-20% of the total cost of the home. There are numerous mortgage loan options available, making it essential to conduct thorough research to identify the best terms that align with your home-purchasing goals.

The Basics: 10% vs. 20%

If you can put down 20% of the total cost of your loan, you'll find that you can access lower rates and more agreeable terms. Unfortunately, 20% can end up as a huge chunk of your budget, and that's without factoring in other fees like closing costs.

As a result, a 10% down payment is quite common. For instance, on a $250,000 loan, this would equate to a $25,000 down payment. But if you were instead to put down $50,000, or 20%, you could potentially see lower long-term costs.

What is PMI?

One of the things you'll need to consider with your down payment is insurance. If you put down 20% or more, you won't be required to obtain Private Mortgage Insurance (PMI).

However, with down payments less than 20%, you will likely be required to obtain PMI -- a form of protection for the lender in case you can't make payments anymore. As with other kinds of insurance, you will be responsible for monthly premium payments.

Are There Other Down Payment Options?

If these numbers feel impossibly high, don't worry. There are options for obtaining financing with less than a 10% down payment.

The most popular alternative loan type for new homeowners is the Federal Housing Administration (FHA) loan. FHA loans are backed by the government, meaning that if you should default on your loan, the lender is protected.

The biggest benefit of FHA loans to consumers is that you can qualify for down payments as low as 3.5%. However, with an FHA loan, you are responsible for paying the monthly premium for the insurance provided by the government, either in monthly payments or in a lump sum.

There are other specialty mortgage options for homebuyers that meet certain criteria. VA loans are offered for veterans, which can require no down payment.

If you are looking for a home in a rural area, you may be eligible for USDA loans, which offer benefits for financing a home in a rural area. 30 out of 67 counties in Florida are considered rural.

How to Decide

When you're deciding how much money to put down, the first consideration will likely be how much cash you have available. Calculate your current and projected financial situation to best understand whether paying more money upfront will be better for you in the long run. Our savings calculator can help you determine how much to save and how long you'll need to achieve your financial goals. 

How Home Ownership Loans Have Changed

Homeownership is a staple of the American dream. Despite its cultural significance as a life goal, modern mortgages did not exist until 1934. In an effort to pull the country out of the Great Depression, the Federal Housing Administration (FHA) began to offer loans to people who had no way of paying cash for their homes.

At that time, a buyer was required to provide a 50 percent down payment, and the mortgage was spread out over three to five years. At the end of the mortgage period, a balloon payment was due.

Over time, expectations for home purchasing changed and the required down payment shifted down to 20%. Property values began to rise during this time. Homes started to become potential investment vehicles and the cost of homeownership faced inflation. Eventually, the down payment requirement was lowered to accommodate rising costs.

And while it’s been years since financial institutions actually required 20 percent down, the number has stuck in the minds of many a potential homebuyer. The housing market has changed significantly in the recent decades.

Many people have begun renting out their homes and spending more money on investment properties. Properties can be rented out to provide a passive income for the homeowners.

This impacted the number of homes available and their affordability. Transitioning from renter to homeowner has become a new type of challenge.

If, like many people, you’re living paycheck to paycheck and believe there is no way to put money aside, you may be surprised by some of the ways you can cut back enough to save for a down payment.

Tips for Home Ownership Savings

1. Create a Household Budget

• Start planning your savings by creating a household budget. This allows you to track your monthly income and expenses. You can reduce or eliminate some discretionary expenses to save more.
• Use the 50/30/20 Rule. It is good practice to use 50% of your monthly income on required expenses, 30% on discretionary expenses, and 20% towards your savings. This will allow you to estimate how much you can contribute to savings monthly. Not sure where to start? Use our budget calculator to determine how much you can save. 

2. Pay Off Credit Cards

• While credit cards can be useful (and even help you build credit), the ever-accumulating interest charges mean that you’re essentially giving your money away.
• Use the “snowball” method to pay your debts off, beginning with the debt with the highest interest rate. Once that bill is gone, add the monthly payment you once dedicated to it to the debt with the next highest interest rate. By the time you have paid off a couple, the process really speeds up and you will be out of debt before you know it.

3. Avoid Eating Out

• The average American spends $300 a month eating out at restaurants.
• Eat at home instead, and you can save $3,639 per year.

4. Eliminate Clutter 

• Sell items you no longer need or use.
• With the advent of online selling venues (including neighborhood sites on Facebook), decide what you can live without and advertise it for sale. $10 here and $20 there can really add up.

5. Increase Your Income with a Second Job

• If you've worked in the service industry, working part-time in the evenings can pull in hundreds or thousands of extra dollars per month.
• If you want to earn money online, look into sites like Upwork or Guru for a second job. These sites list everything from web designers to virtual assistants.

6. Save Your Tax Refund

• Plan to use your tax refund towards your house savings.
• If you expect to get money back, simply plan on putting it away into your house fund instead of spending it.

7. Sell Your Car

• If you live in an area with dependable mass transit, consider selling your car or using alternative transportation.
• Doing without a car until your down payment is sufficient will save you more than $8,500 in a single year.
• If you need that car, bike and walk whenever and wherever possible. At a minimum, you will save on the cost of gasoline.

8. Reassess Your Priorities

• Eliminate unnecessary expenses: streaming services, trips or vacations.
• If owning a home is important to you, consider the ways you can cut back on more luxurious items long enough to hand that down payment to your lender.
• While there may be things on this list you absolutely refuse to cut from your life, add up the potential savings from those you can live without to get a sense of what your savings account will look like in one year.

Next Steps to Planning Homeownership

Saving money can seem like a monumental task. However, after reviewing your monthly finances, you can easily manage your spending habits. There are a variety of ways to decrease spending and increase income. Once you are at a comfortable place with your finances, you can start looking at homes that fit your budget.

The home purchasing process is smooth sailing with the right down payment assistance program. Many cities, counties and states offer down payment assistance programs and grants to help renters become homeowners. Finding out which programs are available in your area is as easy as asking your Seacoast Bank mortgage loan officer.

You can also calculate your estimated monthly loan payment with our Mortgage Loan Calculator to help determine how much home you can afford. Find a Seacoast Bank branch near you to get professional guidance on becoming a homeowner.