LifeGoal Investments Blog

Knowing the average down payment on a house is a critical part of planning to buy a home.

After all, buying a house is a big commitment that takes planning, including making a down payment.
 

First, What Is a Down Payment?

A down payment is when you pay part of the cost of a home upfront with the promise to cover the remaining cost over time. Most people use a loan called a mortgage to cover what's left after making the down payment.

The mortgage covers all the expenses of buying a house, excluding any down payment you make on the home.

In addition to the home's price, home buying expenses often include closing costs. Closing costs range from home inspection fees to taxes. In 2020, homebuyers spent an average of $6,087 in closing costs according to Business Insider.

But instead of paying those expenses upfront, you can get a mortgage from a lender. The lender will agree to give you money to buy the house in exchange for you agreeing to pay off the loan over time with interest.

The lender may require you to make a down payment when you sign the mortgage agreement, and they'll decide how much your down payment should be.

The lender considers many factors when determining the amount of your down payment: Your credit score, income, the price of the house, etc. We'll cover what influences your down payment in a bit.
 
But first, let's find out what most people put down when buying a house.
 

What’s the Average Down Payment on a House?

The median down payment for first-time homebuyers is 7% of a home's purchase price, as cited by the National Association of Realtors. Their survey shows that this number leaps to 16% for repeat buyers. 

As of Dec. 2020, the average down payment on a house was $20,775, according to ATTOM Data Solutions.

Of course, home prices vary, particularly by location, meaning the amount you pay for a down payment depends on where you're buying a house.

At the end of 2020, ATTOM Data Solutions shows the average down payment on a house in San Jose, Calif., was $115,000. While in Oklahoma City, the median down payments were around $28,000.

And, as we mentioned above, your income, credit score, savings, and more can influence the down payment your lender requires you to make when buying a home.

Also, the type of mortgage you use to buy a home can affect your down payment.

Let's walk through some common mortgage types, so you'll know how they'll impact your down payment.
 

Down Payment Requirements For Some Common Mortgages

There are a few types of mortgages most people use when buying a home. Each mortgage has different down payment requirements.

A VA loan is another government-backed loan that may not require a down payment. Issued by the Department of Veterans Affairs, VA loans are available to veterans and service members of the U.S. military or their surviving spouses.
Some people can buy a home using a USDA loan without putting any money down.

A USDA loan is a government-backed loan issued by the U.S. Department of Agriculture. The government designed this mortgage for people buying homes in rural areas.

The minimum down payment when buying a house with an FHA loan is 3.5%.

A Federal Housing Administration (FHA) loan is a government-backed loan created for low- to moderate-income homebuyers. Because FHA loans have less-strict credit and financial requirements than other mortgage types, they're popular with many first-time homebuyers.

Conventional loans require a minimum 3% down payment. However, your credit score, income, and other factors can cause your mortgage lender to require a higher down payment.

A conventional loan is the most frequently used mortgage type. Conventional loans are mortgages that aren't insured or guaranteed by the U.S. government.

Do You Need a 20% Down Payment To Buy a House?

While many people think you need to make at least a 20% down payment to buy a house, that's often not the case.

For example, as we covered above, USDA and VA loans may not require any money down. And you may only need to have a 3% or 3.5% down payment if buying a home with an FHA or conventional loan.

But your lender may require you to buy private mortgage insurance (PMI) if you make a down payment that's less than 20% of the cost of your home. PMI is a type of insurance that protects your mortgage lender if you cannot pay off your loan.

PMI can cost homebuyers $200-$250 per month, money that's added to the monthly mortgage payment.

Along with avoiding PMI, putting at least 20% down can reduce your overall mortgage costs.

For example, you may receive a reduced interest rate. And, because you paid more for your home upfront, your loan will have a lower balance, meaning it will accrue less in interest over the loan's lifetime.

Some people make sure they have at least a 20% down payment to avoid these additional costs when buying a house. But, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, median home prices in the U.S. will exceed $407,000 as of Dec. 2021, it's not always possible for people to save enough money to have a 20% down payment.

And that's OK since most loans don't require a 20% down payment.

Plus, interest rates are running historically low, averaging about 3%. These low rates mean homebuyers are accruing less interest on their home loans than in previous years.

Less interest accrued means less financial benefit to making a 20% down payment when buying a home.

 

How Can You Save for a Down Payment?

One of the first steps, if you're thinking of buying a house, is saving money for a down payment.

Even if you don't need to put 20% down, you still may need to make some down payment. Besides, any money you pay upfront for a house is less money accruing interest over the lifetime of your mortgage.

The best way to save for a down payment is to start saving as early as possible.

You can start with an envelope system where you put one or two dollars each day in your "house" envelope. Then, over time, that money adds up.

Automatic transfers of some of your paycheck into a savings account can also be an effective savings tool.

Check and see if your employer allows you to split your paycheck's direct deposit between accounts. If so, consider allocating as much as you can afford into a savings account.

You might also want to take part-time work and use some of that income to save for a down payment.
 

The LifeGoal Home Down Payment Investment ETF

You can also use the LifeGoal Home Down Payment Investment ETF (ticker: HOM). Unlike the options listed above such as envelope systems and savings accounts, the HOM ETF is an investment in stocks and bonds that may grow your savings over time, with some risk involved. 

Like all investments, there is a possibility that you can lose all or some of the money you put into this ETF, based on market fluctuations. However, the HOM ETF is an ETF that can help you set aside money for a down payment before you decide to buy a house.

Just as you deposit money into a savings account, you can allocate a portion of your paycheck into the HOM ETF. While money in a savings account only grows if you input additional funds, there is also risk of loss of principal when investing in stocks and bonds. 

The HOM ETF is professionally managed, with about 25% of the fund going to stocks and 75% invested in bonds. Some of the fund's investments are in housing stocks to try and offset the cost of housing with potential for better returns. 

Of course, investing in the stock market always carries some risk. If the market price of the ETF decreases, the value of your contribution will decrease. This means the money you put into the fund will have decreased, instead of increasing or maintaining its value. 

As housing costs rise, so may the stocks in which the HOM ETF invests. As a result, investors' returns may increase as those stocks' values go up. As housing costs decrease, the stocks in which the HOM ETF invests may also decrease in value. Similarly, investors’ returns may decrease as those stocks’ values go down. 

However you save for a down payment, the top priority is that you start sooner rather than later. The more you save, the less you'll pay in the long run for your home. Just remember that, if investing in an ETF, there’s always potential of losing some or all of your investment. 
 

Final Thoughts About an Average Down Payment on a House

Buying a house is one of the most significant decisions you'll ever make. Unfortunately, it's also not cheap, as home prices continue rising across the U.S.

Fortunately, mortgages can help many people buy homes. Lenders offer these loans to homebuyers who need help paying the cost of purchasing a house.

Mortgages typically have enough money to cover all home buying expenses, minus your down payment. The average down payment on a house is between 7% and 16% of the purchase price, according to Nerdwallet. Recently, Americans have been paying on average $20,775 for a down payment, according to ATTOM Data Solutions.

Many mortgages, though, require less than the average down payment on a house. For example, two types of mortgages, USDA and VA loans, may take no money down to buy a home.

In most cases, you don't need to make a 20% down payment to buy a home, regardless of the loan you use to finance the purchase. However, your lender may require you to pay for private mortgage insurance if you make less than a 20% down payment. 

Regardless of what you're required to put down for a home, it's crucial to do what you can, as soon as you can, to set aside money for a down payment. Any amount you pay when buying a house is less money earning interest over the lifetime of your mortgage.

We believe the LifeGoal Home Down Payment Investment ETF can be a simplified, two-step way to prepare financially for buying your home by investing in stocks and bonds using a professionally-managed fund.

Visit LifeGoal Investments today to learn more about how we're helping everyday Americans. 


Sources:
Average Mortgage Closing Costs by State | businessinsider.com
The 20% Down Payment Isn't Dead Yet | nerdwallet.com
Top 10 Markets with Highest Down Payments | attomdata.com
Monthly New Residential Sales, October 2021 | census.gov
30-Year Fixed Rate Mortgage Average in the United States | fred.stlouisfed.org