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HomeFinanceHow much cash do you need for a home down payment?

How much cash do you need for a home down payment?

One of the biggest burdens for first-time home buyers is coming up with enough cash for a down payment. And now, they need nearly 25% more than last year to make it happen as the median U.S. home down payment was nearly $56,000 in February, according to a Redfin report released late last week. 

“The rising cost definitely makes purchasing a home a much more difficult prospect,” Brian Mollo, CEO of real estate investment firm Striker Capital and owner of Trusted House Buyers in San Diego, Calif., tells Fortune. “Savings are still abysmally low in most markets, which means to come up with a down payment is a struggle for most—and with the needed amounts increasing, it only becomes harder for the average buyer looking to buy a house.”

The higher home prices and mortgage rates get, the more pressure this puts on homebuyers to put down more money upfront. That’s in order to ease monthly payments, which are also on the rise

“For the last couple of years, we have been dealing with home mortgage rate increases, causing tremendous increases in monthly payments,” Brian Durham, vice president of risk management and managing broker at Realty Group LLC and Realty Group Premier, tells Fortune. “One way to offset that monthly payment is to increase the down payment and financing less.” 

The Redfin report shows that buyers have been doing just that—increasing their down payment amount to offset future costs. Now, a typical homebuyer’s down payment is equal to 15% of the purchase price, up from 10% a year ago. Not only does a larger down payment help the buyer down the road, but it can also be more appealing for sellers choosing among several offers.

“Sellers will sometimes feel that—all other things being equal—the buyer putting more money down is financially a stronger buyer,” Durham says. 

More buyers are making all-cash offers

Despite down payment amounts reaching an all-time high, more home buyers are making all-cash offers. Nearly 35% of home purchases were made in all-cash in February, according to Redfin, the highest share since the pandemic. 

But with home prices as high as they are, how are home buyers affording to make all-cash offers? Well, the prospect of having to pay less in the long run is enticing enough, especially as mortgage rates remain elevated, experts agree. 

“With high mortgage rates, many people are choosing to go the cash route in order to avoid those years of interest payments altogether,” Seamus Nally, CEO of landlord software company TurboTenant, tells Fortune. This “of course, means that those making cash transactions are typically those with higher wealth statuses—most likely not young or first-time homebuyers.”

First-time home buyers are duly challenged in today’s market because they also don’t have the equity from a previous home sale to bolster their down payment or the ability to make an all-cash offer, according to Redfin.

Still, “many all-cash offers come from investors, who were buying up more than one-quarter of the country’s most affordable homes as of the end of last year,” Redfin data journalist Lily Katz wrote in the report last week. “Overall, though, investors are purchasing far fewer homes than they were during the pandemic housing boom.”

While there are some signs that the spring housing market could improve slightly with a “trickle” of new listings, it’s unlikely we’ll experience a noticeable difference in down payments, mortgage rates, and home prices. 

“We will most likely continue to see higher down payments until interest rates come down or we see an increase in new homes being built,” Durham says. “The biggest hole in the market right now is affordable first-time buyer-friendly homes.”

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