Most first-time home buyers ask is “what will my down payment be?” The largest amount you will pay out of pocket for your home buying transaction will be the down payment. This means the down payment could make or break your ability to buy a home. So, is it better to pay less or more?

How Much Will You Need To Pay?

The type of loan you use will determine the minimal amount you will need to pay. Most lenders would like you to put 20% down. That is 20% of the total loan amount. So on a $200,000 home, your down payment would be $40,000! I know, that’s a lot. However, from a lenders standpoint, those who put down a larger down payment show more financial stability. Lenders assume you will be less risky when it comes to repayment.

Government backed loan options were created to help consumers that can’t afford to put that much down. The government helps home buyers get lower down payments through the Federal Housing Administration (FHA). The government does this by guaranteeing certain lenders they will reimburse them for any losses on the loan. On these loans backed by FHA you can put down 3.5% at the least. That’s $7,000 instead of the $40,000 we calculated on that $200,000 home earlier.

There are still many other options out there with low or no money down. Conventional loans have 5% and 3% down payment options. VA loans, which are backed by the U.S. Department of Veteran Affairs offer 100% financing with no down payment for members of the military and their surviving spouses. USDA loans, also known as the Rural Housing Loan offers 100% financing with no down payment and is for low-income home buyers who will purchase a home in a rural area or in some suburban neighbors.

There are also down payment assistance loans that normally cover paying up to 3% of your down payment. These are loans, so you will have to pay them back along with your mortgage payment.

So Whats The Catch With A Low Down Payment?

With every good thing comes a cost and with a low down payment on a house it comes in the form of higher monthly payments because of mortgage insurance. Take note that mortgage insurance isn’t homeowners insurance which protects you from the loss of your home. Mortgage insurance protects the lender in case you default on the loan to ensure they get paid. Some loans won’t require you to pay this monthly but will charge you for this upfront on the loan in some form of a fee.

One good thing is that with a conventional loan once the amount you owe on your loan gets down to 80% of the value of your home you can stop paying mortgage insurance. Also, if you put a 20% down, in the beginning, you won’t need to pay mortgage insurance at all and your monthly payment will naturally be lower because of the large down payment.

Which Route Should You Chose?

At the end of the day, it is best you weigh out these options and make the best decisions based on your situation. A home is a great investment and worth buying into. Putting a large amount down can lower your monthly payments but will take a large sum of liquid cash out of your pocket that you could have used for other things. Getting a lower down payment will cost you more monthly but you will be able to own a part of the American dream. There are up and downsides to paying more or less for your down payment so picking the one that is best for your financial situation is what you should do.