blog home Buying A Crash Course on Downpayments and Loans

A Crash Course on Downpayments and Loans

By The Bassford Team on May 30, 2020

Because it is such an important topic, we want to continue today with a subject we began with a previous post about keeping your current financial situation when buying a house. Last time, we talked about the importance of looking at your financial situation and being honest with yourself about what you can actually afford. Now, we want to explore a little more deeply what that means and how to go about doing it.

Downpayments

Anyone who isn’t planning on purchasing a home with cash – something that changes the conversation completely – will need to know how much they have available as a downpayment. As the name itself suggests, this is the amount of money that you have on hand to offer to the seller. At the current time, given the ongoing COVID-19 pandemic, many banks and lending institutions are not willing to provide loans to prospective buyers who cannot come up with at least 20% of the downpayment on a property.

Loans & Interest

Let’s say that you are interested in a $250k home. You should then be able to come up with $50k on your own, which means that you are then looking for a loan of $200k. To this loan you need to add the interest charged by the lending institution. This number changes, and while it is currently at a fairly low rate (between 3.2% and 4%), it is also important to keep in mind. What it means is that you will not only be borrowing only $200k, but you will be paying back that plus whatever interest that loan accumulates during its lifetime.

What this means for you, the potential buyer, is that you need to know both how much you can afford to put down as well as how much you will be able to pay off per month. Both of these numbers need to work together in order for you to know just what your price range might be. Working again with the numbers above, if you have $50k for a downpayment on a $250k home but don’t have a salary that enables you to make the monthly payments, then it is simply not an option.

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