Buying a home can be intimidating, no matter if it’s your first home or your fourth.
One of the most important things to consider when purchasing a home is how much money you’re using for a down payment. Down payments offset the cost of your mortgage and can even have an impact on your retirement! The more you’re able to put down up-front, the better your financial future will be.
The ideal down payment amount
A down payment is the money you give to the seller to solidify your home purchase. The remainder of the cost will usually be covered by a mortgage loan.
Ideally, you want to pay at least 20 percent of the home price as a down payment. While there are options that allow you to put down less, paying 20 percent up-front helps you get some of the best interest rates on your mortgage and owe less later on.
Paying more than 20 percent is definitely an option, but is not the best one for everyone.
“If you’re able to afford to put more than 20 percent down on your home, it’s often a good idea. However, make sure you weigh your down payment options against your personal financial situation to find the sweet spot,” says Samuel Rad of Affluencer Financial.
Down payment considerations
The size of your down payment is important for a few reasons. First, your mortgage interest rate is calculated in part based on your down payment, so the larger your down payment is, the lower the interest will be. This could help you save a significant amount of money over time.
Second, the money you pay now helps offset the amount you pay later, freeing up money in future years to save for other things.
When thinking about homebuying in terms of planning for retirement, these factors make a huge impact.
A lower down payment on a home will result in a higher mortgage during your loan period. This may require you to make some cuts to your retirement fund contributions, meaning you’re putting less money toward your nest egg.
Even if you don’t cut into your retirement contributions, a smaller down payment can still affect retirement. Lower mortgage payments each month (caused by a higher down payment) can leave you with extra money in the budget to increase retirement savings. This is especially important to think about if you’re buying your first home, since putting more money in savings early on gives it a higher potential to grow.
Buying homes in retirement
If you’ve recently entered retirement and are considering selling your home and buying a new one, you’ll also want to pay attention to your down payment and mortgage costs.
If you’re looking to buy a new home that is more expensive than your current home, be cautious. Putting down a large down payment is still very important, but avoid dipping into your retirement savings for it. Make sure your budget includes room for a new mortgage, as well.
If you’re downsizing, you may have some options. You could sell your current home and use that money to buy the smaller home outright, so you don’t have to take out another mortgage. Not only will this method keep you debt-free, but it can increase your available funds each month.
However, putting down a large down payment and taking out a smaller mortgage with a lower interest rate can prevent you from tying up all your cash in a house, where you may not be able to get it back out.
A financial advisor in Los Angeles can help you work through the financial details related to buying a home for the first time or during retirement. Rather than make the wrong decision and jeopardize your financial future, speak with an expert to determine your best move when it comes to down payments, mortgages and more.