Which Downpayment Strategy is Right for You?

Downpayment
What downpayment strategy is 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, as it shows that you have the financial discipline and stability to save for a long-term goal. It also helps you get favorable rates from lenders among other benefits.

But there can actually be financial benefits to putting down a small down payment—as low as three percent and sometimes no-money down—rather than parting with so much cash up front, even if you have the money available.

THE DOWNSIDE

The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years, and the lower your down payment, the more you’ll pay. 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

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 equity is the same.  You may find that even with low or no money down, the interest rate and mortgage insurance, you are paying 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 downpayment can lead to a higher return on investment, while also leaving 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.

(Keep in mind that besides downpayment, buyers typically must also pay closing costs in addition to whatever minimum downpayment may be required.  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.

 

Alabama First-Time Homebuyer Savings Account!

Becoming a homeowner is a big step with big rewards. However, it can also be a challenge, especially when it comes to saving for a down payment. Thanks to a new law that goes into effect in 2019, Alabamians will be able to save for a down payment with the First-Time Homebuyer Savings Account Program, an Alabama state tax-free savings account dedicated to the purchase of your first home. It also applies to those re-entering the housing market if you haven’t owned a home in the last 10 years.

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Individuals or couples can open one of these tax-free savings accounts at any local bank, credit union or other financial institution in Alabama.

 

 

The principal deposits and earnings will be deductible on your state income taxes. Savings from the account can be used to pay for the down payment and/or closing costs for the purchase of a single family dwelling.

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Mythbuster: Many people believe that they need to put 20% down to purchase a home.

 

 

The average down payment is actually closer to 11%. In many cases, the down payment can be even lower than that.  In our area, there are often low money down options–and your savings may be used for closing costs!

If you want to own a home, opening a tax-free savings account through the First-Time Homebuyer Savings Account Program is an important first step in making your dream a reality. To learn more about this program contact me, your local bank or credit union, and view the Infographic.

Information courtesy of Alabama Association of Realtors.