How Much Down Payment Do You Need to Buy a Home?

The down payment. Cue the dramatic, fear-filled suspense music. Yeah, it’s scary. Coming up with enough cash to put down when buying a house is the single biggest roadblock for most hopeful homebuyers. But how much do you really need?

A standard down payment

Most lenders are looking for 20% down payments. That’s $60,000 on a $300,000 home. (There’s that scary music again.) With 20% down, lenders will love you more. First off, you’ll have a better chance of getting approved for a loan. And you’ll earn a better mortgage interest rate. There are all sorts of other benefits too:

  • Lower upfront fees (we’ll talk more about that in a second)
  • Lower ongoing fees (more on that too)
  • More equity in your home right off the bat
  • A lower monthly payment

Of course there is one big, juicy caveat: The down payment is not the only upfront money you have to deal with. There are loan closing costs and earnest money to consider as well. Before the dramatic music returns, let’s explore some lower down payment options.

Getting in for less

You can actually buy a home with as little as 3% down. Why did we wait so long to give you that good news? Well, let’s provide the details first before we weigh the pros and cons.

The Federal Housing Administration is a government agency charged with helping home buyers — especially first timers — get approved. The FHA assists mortgage lenders to make loans by guaranteeing a portion of the balance. That’s how you can put less money down — in fact, as little as 3.5%. And FHA loan rates are among some of the lowest you’ll find.

Plus, Fannie Mae and Freddie Mac, the government-sponsored companies that drive the residential mortgage credit market, have announced 3% down payments on home loans. Some major commercial lenders are also offering low down payments — and even no down payments — as incentives to spur loan demand.

And if you’re an active or retired service member, or live in a rural area, you may have access to zero down payment programs through the Department of Veterans Affairs or the Department of Agriculture’s Rural Development program. It’s always a good idea to ask a lender about down payment options when you’re shopping for a mortgage.

Or is it more?

So, which is it: Do you want to put $60,000 or $9,000 down on that $300,000 home? Or does zero down make you spring into a happy dance? Sounds like a pretty easy decision, right? But you knew there would be fine print.

A lower down payment makes you a bigger risk in the eyes of the lender. That’s why it will look for help from one of those government programs to guarantee a portion of the loan. The thing is, you pay for the guarantee. It’s called mortgage insurance. There will be an upfront fee and likely an ongoing charge built into your monthly payment.

Some of the programs don’t require mortgage insurance, but will charge an “upfront guarantee fee” or “funding fee.” Whatever you call it, a fee is a fee. And as a “higher risk,” you’ll likely pay a higher interest rate for the life of the loan in addition to the other fees.

Making the right move

It’s tempting to go with the lowest all-in upfront charges when trying to buy a home. But the key to building net worth is to buy smart, especially when it comes to such a large purchase as a house.

Lenders are required to disclose all fees and it’s always a good idea to shop around with multiple mortgage providers to get your best deal. Plus, the more you explore your options, the more you’ll learn about the process. Taking time to compare the fees from different lenders can save you thousands of dollars over the long haul.

The down payment is just the first financial hurdle. The monthly payments last a lot longer. Let’s get out of here before that spooky music comes back.

© 2017 NerdWallet, Inc. All Rights Reserved

4 Reasons to Buy a Home Instead of Renting

The financial benefits of buying a home compared with renting have yoyoed over the years, especially of late. If you’re sitting on the fence, here are four circumstances in which it may be a better bet to buy.

If interest rates remain low

From a financing perspective, if this isn’t the best time to buy a house, it’s pretty darn close.

The average interest rate on a 30-year fixed mortgage, the most common variety, has hovered below or near 4% for a while now. For comparison’s sake, if you bought about 10 years ago, the average interest rate was 6.41%. In 1996, it was 7.81%, and in 1981 it was a whopping 16.63%.

Although the Federal Reserve has begun to inch rates upward, it is likely that it will do so slowly and that it will be a while before the cost of borrowing to buy a home stops being historically low.

If home prices level off

Home prices rose steadily in the 1970s, ’80s, ’90s and 2000s before plunging around 2007, and in the past few years they have been climbing again. Different markets have seen different trends, of course, but generally what’s at play is supply and demand: More potential buyers than houses available means sellers can dictate terms and get top dollar.

But something interesting is happening: The oft-told story that millennials are renting for longer or living with their parents nowadays is not entirely accurate. No, people in this age group (born between 1981 and 1997) want very much to own a home, but they are putting it off because of real and imagined difficulties in affording it.

That could mean fewer potential buyers and a cooling of the upward surge in home prices. While others wait, you could pounce.

If rental costs continue rising

Real estate researcher Reis Inc. reports that apartment rents rose 4.6% in 2015. In hot housing markets such as California and the Pacific Northwest, rents are going up by about 14% per year. According to Zillow, the median asking price nationwide for a rental was $1,575 per month in early 2016.

The monthly payment on a $200,000 mortgage — about the average in the U.S. — with a 4% interest rate would be just over $950. Even with taxes, insurance and maintenance, it’s tough to make a financial case in favor of renting.

If you want to save money

Home values over the past 70 years have generally tracked with inflation. Yes, you could make more money in the stock market. But we’re talking real life, not investment advice. Consider two things:

Your rent is locked in for a year or two, then will go up. Your mortgage payment can be the same for 30 years.

If you are raising a family, it seems all but impossible to save money. But when you sell the house after 30 years (or 20 or 10), someone will hand you hundreds of thousands of dollars, money that could put the kids through college or finance your retirement.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved

Why You Should Get Pre-approved for a Car Loan

When shopping for a new car, many people overlook one important step: getting pre-approved for an auto loan. It’s a simple process that can make car-buying go more smoothly and save you money.

Pre-approval is a quick assessment of your ability to pay off a loan based on your credit history and current financial state. This is how it works: You visit NCCU, in person or online, and provide proof of your identity — such as your driver’s license or Social Security number — your household income, and perhaps your housing costs. The lender will likely run a credit check. Then you’ll find out how much it would be willing to lend you and at what rate — sometimes on the spot.

Here’s why you should get pre-approved.

You can get a better interest rate

If you haven’t done your homework, your dealership might try to talk you into a loan at a not-so-great rate. But getting pre-approved at NCCU means you can assess the dealership’s offer, and you don’t have to accept it. Bringing your interest rate down just one or two percentage points can save you hundreds, maybe thousands, of dollars over the life of your loan.

You can set a true budget

Once you’re pre-approved for a loan, you can plan your purchase. Use an auto loan calculator to factor in a down payment, the value of your trade-in — which you can find online — and your desired monthly payment. Add about 10% for sales tax and other fees. And don’t forget about insurance and the other costs that come with owning a car.

Adjust your dreams — and budget — accordingly. Then go shopping.

You can better negotiate with the dealer

Letting your dealer know that you’re pre-approved shows that you’re a ready-to-buy customer who can walk away at any time. That curtails a lot of the early verbal dancing. Just announce you have your pre-approval and will only talk price. Try something like this: “I’m looking for this model, in a deep blue with black leather interior and rear parking sensors. I just stopped in quickly to find out the price I would pay after you take my car as a trade-in.” If the salesman doesn’t listen, say, “I just want to hear that one number.” It’s not rude to be assertive in this situation.

And as you’re signing all the papers in the finance office, if a salesperson tries tempting you with an extended warranty or other last-minute add-ons, you can use your pre-approval to stick to your price.

When you’re pre-approved for a loan, you have the competitive edge in car-buying. You can say no until they say yes.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved

Refinancing Auto Loans 101

If you’re paying too much in interest on your car or truck loan, refinancing could be a great way to save some serious dough. Interest rates for vehicle loans may have dropped since you financed your auto. Or maybe you’ve improved your credit score, which could qualify you for a lower rate. Either way, it could be worth hundreds of dollars in savings to get a new auto loan to replace your current one.

The process is fairly simple. You’ll need to contact your current lender to get your loan’s payoff information. Then, you can apply for financing from a new lender that offers a lower interest rate. You’ll typically be asked to provide recent account statements, W-2s or other proof of income, and give permission for the lender to run a credit check. You can usually receive a response within a day. Once approved, the funds can be sent to pay off your existing loan, and the title would be transferred to the new lender.

Money-saving scenario

Suppose last year you financed $25,000 at 8% interest for a five-year car loan. Your monthly principal and interest payment would be about $507. But say today you could refinance the balance (just over $20,000) for the remaining four years at a lower rate of 3%. Your payment would drop to $451. That’s a savings of $56 a month, or $2,688 over four years, with the same payoff date.

You could also refinance for a longer loan term. This could reduce your monthly payment and give you more room in your personal budget. If your income drops or you have unexpected expenses, refinancing to a lower monthly payment could be one way to make sure you can pay your bills.

Choose carefully

For all the potential positives of an auto refinancing, there could be some drawbacks. If the new loan pushes your payoff date further into the future, you could end up paying more money overall in interest. Also, any new loan may incur title and registration fees, which vary by state. If you do refinance, don’t forget to tell your insurer.

There could also be costs to get out of your old loan. If you have a prepayment penalty, or the lender requires you to pay all remaining interest upfront, it would reduce your savings from refinancing.

Some car loans are “frontloaded” so your monthly bill mostly pays for interest during the first part of the term. If you’ve had your existing loan for a few years, your remaining payments would mostly go toward principal. That means a refi, even at a lower rate, may not save you enough to justify the cost.

Be sure to add up all the fees for paying off your old loan. Then, compare that amount to how much you’d save with a refinance, and see whether the benefits outweigh the costs.

An auto loan refinance can be a smart move in the right situations. By receiving a lower rate, you could cut your interest costs, reduce your monthly payment and save big.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved

How to Buy a Used Car

Shopping for a used car is a great way to get the most vehicle possible for your money, and there are lots of preowned gems out there just waiting to be found. These simple steps can help you choose one you can drive happily for years to come.

Calculate your budget and explore financing

Keeping your total ongoing car costs (including loan payments, insurance, maintenance and gas) within 20% of your net income should leave you enough cash for other expenses and a little fun as well. An online loan calculator can help you figure out what you can truly afford to borrow. Then, if you can, lock in a preapproved loan and rate.

Shop only for cars that fit your lifestyle

Your individual style is one of the most important considerations when it comes to choosing a used car. If you often drive in severe winter weather, for example, you’ll likely do better with an all-wheel-drive vehicle rather than a sports car. A long daily commute means that fuel economy matters, and that you’ll want seats with good back support. Those who have to haul lots of gear for kids, hobbies or work should look for something with ample cargo space.

Research the true costs of ownership

When you find a car that appeals to you, check out the reliability record and ownership costs for that model from trustworthy organizations such as J.D. Power, Kelley Blue Book or Consumer Reports. It also pays to contact insurers to make sure you’ll be able to afford the premiums on that vehicle.

Investigate the car’s past

Becoming a used-car detective is easy when you get an official car history report from a reliable organization that’s been vetted by the National Motor Vehicle Title Information System. The report will reveal any reported accidents involving the vehicle and how many owners it’s had. To rule out the possibility of an unreported accident, flood damage or other issues, look the car over carefully yourself. It should smell clean and have matching carpet throughout, and the paint job should be uniform.

Go for a test drive

Taking a car for a drive can give you a feel for the vehicle. While driving, be sure to try out all the controls, including windows, wipers, moonroof, heat and air conditioning. The car should start easily, run smoothly, and everything should work. If all looks good, have a trusted mechanic give the car a once-over for added peace of mind.

Close the deal

Once a price is negotiated and financing is approved, you’ll be ready for the final exchange. Inspect the title carefully to ensure it’s legitimate, and that it’s a standard rather than a “salvage” document.

Making an informed used-car purchase is well worth the extra time. The reward for the energy invested is driving away in a car that works with your finances, habits and unique personality.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved

How to Buy a New Car

The number of decisions you have to make when buying a new car can be dizzying. And while many of them will depend on your individual needs and wants, there are some steps you should take no matter what to ensure you get the best deal.

Assess your credit and financing options

Unless you plan to pay cash, your credit will matter a great deal as you look for financing. Get your (free) credit report from AnnualCreditReport.com and look for any errors.

You can get financing through the dealer, but it’s far from your only option. Inquire at your credit union about their auto loans and ask to be pre-approved. If you are, take the approval with you to the dealer. Consumer Reports offers some useful do’s and don’ts at the dealership.

If you are getting rid of an old car, you can sell it to someone or trade it in at the dealership, and put the proceeds toward a new car. Use the Kelley Blue Book to find estimates of your car’s trade-in value and the price you can expect if you sell it. There are also a number of car-shopping apps you can check for competitive offers.

Set a budget that makes sense

Add up your pre-approved loan, the value of your trade-in and any down payment you plan to make, then subtract about 10% for taxes and fees (rates vary by state). This will give you a good idea of what you can spend. If you want to go by how much you can afford to pay each month, use an affordability calculator to see where you stand.

Buying the car isn’t the last time you’ll put money into it, of course. There’s gas, maintenance and much more. At sites such as Edmunds.com, KBB.com and NADAguides.com, use a metric called “five-year cost to own” to get a more complete view of how much your chosen vehicle will cost you.

Do your research

Look up dealerships on customer-review sites like Yelp (filtering out the nonsense, of course) and on auto websites such as DealerRater.com (where the comments are moderated). Conduct research into your chosen make and model and options, too, so that you’ll know when the dealer quotes a price that’s just too much.

When you’re ready to get those quotes from dealers, shop around — from home. Edmunds.com recommends calling at least three dealerships that carry the car you want and asking for the Internet sales manager. The idea is this person deals with savvier customers and so is more likely to go lower. And play the offers off one another to really get the best deal.

Hold your ground

Like the grocery store stocks goodies in the checkout aisle, the dealer may offer you an extended warranty or service deal just before you start signing the paperwork. The goal is the same: to get a last little bit of money from you. Resist.

© Copyright 2016 NerdWallet, Inc. All Rights Reserved

0% Auto Loan Might Not Be the Best Deal

In seeking the best deal on your next car, you might’ve stumbled upon advertisements or offers to get a 0% interest auto loan. As great as this sounds, you may not save as much as you expect with this type of incentive.

Since auto loans can come through either a dealer or a lender, such as a bank or credit union, it’s important to note that a 0% interest loan generally, if not always, is obtained through a dealer. Automakers offer them to attract buyers to certain car models, especially ones that aren’t selling well. Here are a few things to consider about 0% financing and why it might not be in your best interest to use it.

You might be forfeiting a better deal

Typically, you can’t receive both reduced rate financing and a cash rebate when you buy a car, so you may have to choose one. Manufacturers’ cash rebates can range from a couple hundred to a few thousand dollars. The well-known auto research website Edmunds found that the cost of incentives that automakers pay to attract customers was around $2,300 per car industrywide, which includes cash rebates and cost of reduced financing.

While a 0% loan may sound appealing, a cash rebate might save you more money. If you buy a $20,000 car that has a $2,300 rebate, you are really paying $17,700 plus interest. If your interest rate for a five-year loan is 3%, a typical rate, you will pay a total of $1,383 in interest. That brings the cost of the car plus interest to $19,083, saving you $917 compared with what you’d pay with a 0% loan.

Rate may not last as long as your loan

Some car models may have 0% financing for a limited term, such as five years, which could be less than the length of your auto loan. In the third quarter of 2015, the average loan term for a new car was five years and seven months, and the term for used cars was five years and three months, according to Experian’s State of the Automotive Finance Market report. These are the longest average terms calculated since the firm began collecting data in 2006.

You may even receive a longer loan if you want lower monthly payments than you were offered initially. If your term is longer than the 0% financing deal, you generally pay interest on the remaining months or years.

This offer can be limited

A 0% rate might only be offered for a handful of models, especially newer cars, and less for used cars or older models. But even if this deal is available for the car you want, qualifying for it typically requires a high credit score. Check on the eligibility rules for getting this rate before stepping onto the dealer’s lot if you can.

As you sift through car prices and incentives, remember that trade-offs are part of the process when buying a car. Although a 0% interest rate may save you money in some cases, you might also be letting a better savings opportunity pass you by.

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