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Recommended Equity for Purchasing a Home

When looking to purchase a home, you need to come up with a down payment. The down payment can also be called equity. The amount of money you need to get you into your own house varies. This number can range from zero percent to 20 percent; however, in the U.S. housing market, if you put down less than 20 percent you will need to pay other fees.

  1. Equity

    • To calculate the equity in your home, take the fair market value and subtract the amount of the loan or mortgage you have or plan to have on the home. This gives you the equity you have or will have in the home once you make the down payment. In essence, the down payment you make on the home equals the equity you will have in the home at the time of the purchase. As you pay down your loan on the home, the equity you have in the home should increase, unless the fair market value of your home declines.

    Recommended Down Payment

    • According to LendingTree.com, U.S. banks generally require that you have at least a 20 percent down payment before they will grant you a conventional mortgage. First-time homebuyers must save to come up with the required 20 percent down payment, while home owners can use their home equity for the down payment. If the person purchasing the home is already a homeowner, he can use the money he earns by selling his first home as a down payment for the new home. People who have less than 20 percent for down payments can and do purchase homes, but they find themselves paying in other ways.

    Less Than 20 Percent

    • If you purchase a home with a lower down payment than the recommended 20 percent, you will find yourself paying back your mortgage loan at a higher interest rate than you would have with a conventional mortgage. In addition to the high interest rate, you will also have to pay for private mortgage insurance. This insurance protects the lender in the event that you default on the loan. Add the mortgage principle onto these fees, and the result is a higher mortgage payment than you would have with a conventional mortgage.

    Risk of a Low Down Payment

    • During the U.S. mortgage crisis of the late 2000s, many people who could not afford the homes they had purchased experienced foreclosures at alarming rates. According to the Fiscal Times, RealtyTrac reported 2.9 million foreclosures in 2010 alone. As a result of the crisis, federal officials proposed legislation that would require a 20 percent down payment for a qualified residential mortgage. They also proposed that banks would take on some of the risk for granting mortgages to people who only made low down payments. In sum, the larger your initial down payment, the lower your mortgage payments will be in the future. Low mortgage payments cut down on the risk that you will miss payments. Missing mortgage payments could result in home foreclosure.

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