After announcing my intention to to start saving for a home on Monday, I’ve been doing a lot of digging about mortgages and down payments and PMI (oh my!). In the process I came across this cool infographic about how various down payment sizes and the length of the mortgage (15 versus 30 years) impact monthly housing costs and wanted to share it with you guys. It was very eye-opening!
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The graphic makes it pretty clear that the larger the down payment, the better (a 15-year mortgage is out of the question for me, so I’m not even going to address that!). Not only does a large down payment reduce the principal of the loan, but putting a whole 20% down also means you avoid paying PMI every month. It’s settled: a big down payment is good. Got it.
So like a good personal finance blogger, I did some calculations…and then nearly fainted. For me, a 20% downpayment on a decent home in a decent part of town will run me $50,000! How the heck do people save up that much money? Slow and steady, I suppose. Gulp. Glad I’m starting now.
Just to satisfy my curiosity, I did a little research about down payment requirements in other countries – is 20% the gold standard outside of the U.S., or is some other amount the norm? Apparently, the home-buying process (including the 20% down payment standard) in the U.K. and Canada is pretty similar to the U.S. I did discover that variable-rate mortgages are more common in other countries than in the United States and that in the U.K. the process of purchasing a home is notoriously slow. But 20% seems to be well-accepted outside the United States.
In Australia, if you intend to buy a house, two critical considerations are the downpayment and interest rates. The first thing any lending institution will ask you when you approach it for a home loan is the size of downpayment you’re prepared to make, while the interest rate will determine the size of repayments. If you do wish to buy a house, one of the best resources for finding available properties is http://www.homesales.com.au/.
If you aren’t prepared to make a downpayment, many banks will decline your application. When the economy is performing poorly, a downpayment shows a lender that you’re serious about purchasing a home and are more likely to be able to make loan repayments.
Real estate experts generally recommend a downpayment of at least five percent, although a downpayment of more than 10 percent will help you to get a better interest rate and more favourable loan terms.
The Reserve Bank of Australia (kind of like the Fed in the U.S.) cut the official interest rate several times in 2012. Banks will swiftly pass interest rate rises on to their customers, but are more reticent with cuts, which the treasurer, Wayne Swan, said could make customers angry.
If you own a home, how much money did you put down? How the heck did you save up that much money?! I’m not just being nosy, this is legitimate research, people! 🙂