Dan Wowk
Down Payments; What are they and how do you Calculate them?
7/5/2019
Saving up for a down payment is the first step when you want to purchase a home. But what is a down payment and how much does it cost? A down payment is the initial amount paid upfront when purchasing a home, expressed as a percentage of the home value, any remaining owed value is then amortized as a mortgage loan.
You might be asking yourself, where is this money coming from? The answer is not a simple as it sounds, there are many ways that a down payment can be paid. The most popular place down payments come from is a savings account. Most people save for years before purchasing a home so they can put down as much as possible up front. Others who may not have enough saved, still have other options they can consider. Gift funds, IRA, down payment assistant programs or a piggyback loan are all feasible options to investigate.
In Canada the minimum down payment required is 5% of the value of the home being purchased and increases as the home price increases. It is better to put down as much as feasible upfront as it helps reduce mortgage payments and insurance costs. The breakdown for down payment cost and the subsequent default mortgage insurance costs are as followed:
|
Home Cost |
Down Payment |
|
Less than $500 000 |
5% |
|
Between $500 000 - $999 999 |
5% of first $500 000 + 10% of remaining value over $500 000 |
|
$1 000 000 or more |
20% |
|
Down Payment |
Insurance |
|
5% - 99.9% |
4% |
|
10% - 14.99% |
3.1% |
|
15% - 19.99% |
2.8% |
|
20% + |
0% |
If the home costs between $500 000 and $999 999 then more calculation is required. For example, if purchasing a home that costs $600 000 the down payment is as follows:
5% of $500 000 = $25 000
$600 000 - $500 000 = $100 000
10% of $100 000 = $10 000
$25 000 + $10 000 = $35 000
Therefore, the down payment must be a minimum of $35 000.
On the other hand, if you have been putting money aside for a down payment on a home, then it can be confusing on which homes are available to you, in what price range. The formula to find out how much you can afford is as follows:
(amount saved-$25 000/0.10) + $500 000
For example, if you have $35 000 then you would calculate it like this:
($35 000-$25 00/0.10) + $500 000
= ($10 000/0.10) + $500 000
= $100 000 + $500 000
= $600 000
Therefore, the maximum house you can afford is $600 000.
Down payments are one of the most essential and one of the first steps when purchasing a home. It can be difficult to calculate and frustrating to pull together, but it brings you that much closer to becoming a home owner.
