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 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 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.