Your down payment will significantly affect your monthly finances for the life of your mortgage. How much do I need down? That depends on the type of mortgage you will be getting and your credit. Traditional down payments are 20% of the price of the home. 20% down is rare in today’s mortgage world. Typical down is usually 3% – 5%, though an array of mortgage options are available. Here is a great article that answers the question.
How much down should you have? Dave Ramsey has said that his favorite loan program is the 100% down program. I fully agree. As much as you can put down, the better. As most of us don’t have $250,000 sitting around and need the mortgage to get us into a home, let’s look at a couple of mortgage scenarios on the Homes in Order Mortgage Calculator.
#1. 0% Down
#2. 3% Down
#3. 5% Down
So, as you can see, the more down payment you have, the lower your monthly payments will be. Now, let’s play with the calculator and see what would happen in different scenarios. Let’s say you go for a 0% down loan, but make a 5% prepayment up front. How much would you save?
#4. 5% Prepayment up front
Interesting. You’d save over $38,900 in interest, and you’d save over 3.2 years. In all scenarios, you would be repaying the principal. But let’s look at the interest obligation. When you look at interest, this would be the best option! Why? Well, notice that the monthly payment is higher, so you’d be paying more each month. Total interest in #3 is $221,482.49. Total interest in #4 is 194,229.86. You would save $27,252.63 in interest by making the prepayment up front.
Cool stuff! Every mortgage is unique, and every mortgagee has unique needs. But keep this in mind — the faster you can pay it off, the more you will save.