A down payment is your first cash-down on the home price when you make an offer to purchase. Once it is paid, it is subtracted from the purchase price of your home. The remaining cost is subsequently paid-off through your mortgage loan.
The amount that you put in for your down payment varies and depends on the total cost of the house. Consequently, the down payment you choose will determine whether or not you’ll have a conventional mortgage or a high-ratio mortgage with insurance.
The minimum amount that you will need for your down payment is shown in the table below. However, individuals who are self-employed or who have poor-credit may require to provide a larger down payment.
Table 1. Minimum Amount for Down Payment
|Total Cost of House||Minimum Down Payment Amount|
|$500,000 or less||5% of the total cost|
|$500,000 to $999,999||5% for the first $500,000 and 10% for the portion above $500,000|
|$1 million or more||20% of the total cost|
Conventional Mortgage vs. High-Ratio Mortgage:
When you put a down payment that is 20% or more of the total cost of the house then you are eligible for a conventional mortgage (a type of homebuyer’s loan that is not secured by a government entity but rather available through a private lender).
On the other hand, when your down payment is less than 20%, then you will be subject to the high-ratio mortgage which includes purchasing mortgage insurance to cover the higher risk of this loan (your lender will help you coordinate this step).
Cost of Mortgage Loan Insurance:
Mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of your mortgage and is respectively based on your down payment amount. As a rule, the bigger your down payment is, the less you’ll pay in mortgage loan insurance premiums. Typically, your lender will pass these costs on to you and will give you the exact price when you apply for a mortgage.
Use our quick calculator to get an idea of what your final cost would be depending on the down payment amount you choose to pay:
*Insert calculator chart*
To conclude and to answer the question in one simple sentence: the higher the down payment amount, the more you will be saving in the long-run. Therefore, the benefits of a larger down payment consist of interest saved, less fees, lower or no insurance premiums, and possibly a lower interest rate.