Is the common myth of saving for a downpayment keeping you from buying a home?


young couple hold the keys to the home they just bought with an effective down payment
(StatePoint) If you think saving for a down payment is your number one barrier to homeownership, it’s important to understand how down payments work, how much is necessary and what programs can help you secure the funds you need.

To get you started, Freddie Mac is answering some frequently asked questions:

1. What is a down payment and how does it affect my mortgage?
A down payment is the amount of money you pay up front when purchasing a home, and it’s generally calculated as a percentage of the total home price. When you put more money down at the outset, the amount you need to borrow from your lender decreases, and so do your monthly mortgage payments.

Although a larger down payment can be beneficial for this reason, it may not be in your best interest if it would leave you in a compromised financial position with no cushion.

However, a smaller down payment can help you become a homeowner faster and begin building equity sooner.

2. How large should my down payment be?
A Freddie Mac survey found that nearly one-third of prospective homebuyers believe you need to make a down payment of at least 20% to buy a home. This myth remains one of the largest perceived barriers to homeownership.

The truth is that the typical down payment is between 5% and 20%, and some mortgage programs make it possible to put down as little as 3%. Your down payment size will depend on your financial situation, your lender and your eligibility for different types of mortgages.

Bear in mind that if you put down less than 20% and have a conventional loan, you’ll need to budget for private mortgage insurance (PMI), an added insurance policy that protects the lender if you’re unable to pay your mortgage. This monthly fee is rolled into your mortgage payment.

Expect to pay approximately $30 to $70 per month for every $100,000 you borrow. The good news? Many types of loans allow you to cancel your PMI once you’ve built 20% equity in your home.

You can use Freddie Mac’s down payment calculator at myhome.freddiemac.com/resources/calculators/down-payment to explore how different down payment amounts affect how much you pay each month and over the life of your loan.

3. Where can I turn for help?
Struggling to save for a down payment? There are many forms of down payment assistance, including grants, mortgage credit certificates, individual development accounts, down payment assistance loans and even monetary gifts from family members.

For those earning 50% or less than their area’s median income, Freddie Mac offers a $2,500 credit to qualified individuals to assist with down payment and other closing costs.

A housing counselor or lender can explain the ins and outs of each of these options, and help you determine which make sense for your situation. Ask your lender about DPA One, a free tool from Freddie Mac that lenders can use to help connect you with down payment assistance programs available in your area.

Saving for a down payment can sound daunting, but you may be overestimating the up-front cost. The truth is that homeownership may be a practical and affordable option for you now.