Buying a home is, for many people, the largest financial undertaking of their lives. So, how do the numbers work? How is the price of a property converted into a transaction? Let’s take a look at how to pay for a house by focusing on some of the major components in a real estate purchase, namely the down payment, earnest money, and the mortgage payments required to successfully buy a home.
How to Pay for a House
If you have enough money available, it is possible to make an all-cash offer on a house. Most home buyers, however, save enough money to make a down payment that works for them and finance the remainder of a home purchase with a mortgage. Saving money to buy a house requires significant planning, but by being proactive, you’ll eventually put yourself in a position of higher buying power. Reducing debt, increasing savings contributions, and finding additional streams of income are all helpful ways of generating some extra cash to pay for a house.
Making a Down Payment on a Home
The down payment is a lump sum paid upfront by the buyer. The actual down payment amount varies by transaction, but it’s usually somewhere between 3% and 20% of the home’s purchase price. It’s one of the most important home buying costs, given how much planning goes into it. There’s a snowball effect with the down payment; once you figure out how much of a down payment you can afford, that will determine your home loan’s principal amount. The higher the down payment, the less risk for the mortgage lender. When buyers aren’t able to make a down payment of 20% of the purchase price, lenders will require they purchase additional mortgage insurance to protect the investment.
To get an idea of how different down payment amounts affect the financial structure of a home purchase, use our Home Monthly Payment Calculator by clicking the button below. With current rates based on national averages and customizable mortgage terms, you can experiment with different values to get an estimate of your monthly payment for any listing price. Image Source: Getty Images – Image Credit: Perawit Boonchu
Earnest Money and Escrow
A real estate transaction is not your typical purchase. With so much money being moved around, it requires a little extra protection. This is where escrow comes in. Escrow ensures that your earnest money or “good faith deposit” gets properly disbursed according to plan during the home buying process, and holds property tax and homeowners insurance funds during the life of your home loan.
Making Mortgage Payments
Searching for a home loan is similar to searching for a home: there are many options, but based on what’s affordable and what works for your situation, you’ll eventually find the right one. When looking at the different types of home loans, you’ll compare the loans’ terms, interest rates, and conditions for repayment. For example, 15-year and 30-year mortgages are two of the most common home loan products. You’ll have lower monthly payments with a 30-year loan, but you’ll pay more interest over the life of the loan. With a 15-year mortgage, you’ll have higher monthly payments but pay less in total interest. Work with your mortgage broker to find the best home loan for you.