What down payment strategy is right for you?
You’ve most likely heard the rule: Save for a 20-percent down payment before you buy a home. The logic behind saving 20 percent is solid. This is because it shows that you have the financial discipline and stability to save for a long-term goal. Also, having a larger down payment helps you get favorable rates from lenders among other benefits. But it’s not always best. What down payment strategy is right for you?
There can actually be financial benefits to putting down a small down payment. Some down payments are commonly as low as three percent and sometimes no-money down. This may be better than parting with so much cash up front, even if you have the money available.
THE DOWNSIDE to a low down payment strategy:
The downsides of a small down payment are pretty well known. You’ll often have to pay Private Mortgage Insurance for years. The lower your down payment, the more you’ll pay. You may have an added cost of Private Mortgage Insurance and a higher interest rate. You’ll also be offered a lesser loan amount than borrowers who have a 20-percent down payment, which will eliminate some homes from your search.
THE UPSIDE to a low down payment strategy:
The national average for home appreciation is about five percent. The appreciation is independent from your home payment. So whether you put down 20 percent or three percent, the increase in home value equity is the same. Even with low or no money down, interest rate, mortgage insurance, and taxes, you may pay less than or about the same as you are currently paying for rent. It could make sense for you to jump into the market and at least start to build equity. If you’re looking at your home as an investment, putting down a smaller amount of down payment can lead to a higher return on investment. And making a lower down payment will also leave more of your savings free for home repairs, upgrades, or other investment opportunities.
THE “HAPPY” MEDIUM:
Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security and advantages of a traditional 20 percent and an investment-focused, small down payment of 0-3%.
Another thing to keep in mind: besides down payment, buyers typically must also pay closing costs in addition to down payment. Depending on the market and your loan product, sellers may contribute none, some or all of your closing costs.
To learn more about what is involved in purchasing a home, don’t hesitate to contact me for a complimentary home buyer consultation.