You most likely have heard that it is best to save a 20-percent down payment before you purchase a home. The logic behind this is solid because it shows you have the financial discipline and stability to save for a long-term goal. It can also help you receive favorable rates from lenders. However, there can be benefits to putting down a small down payment as low as 3 percent, even if you have the money available. Michele Harmon Team is here to provide you with the downsides and upsides of each strategy so that you can decide which option is right for you.
The Downside of a Small Down Payment
The downsides of providing a small down payment are pretty well known. You will be required to pay private mortgage insurance for years and the lower your down payment, the more you will pay per month. Private mortgage insurance is put in place to protect the bank if you ever default on your mortgage loan. At times, mortgages will allow you to remove mortgage insurance once you reach 20-percent equity, but sometimes you may be required to pay it for the duration of the loan. In addition, you may also be offered a lesser loan amount than borrowers who have a 20-percent down payment, resulting in elimination of some homes from your search.
It is important to consider what you can afford as your monthly payment. When you put less down, your monthly payment will be larger. Opting for a smaller down payment will also limit the amount of immediate built-in equity you will have.
Today’s market is hot! Many homes are selling with multiple offers because of low inventory. When a Seller is making a decision on what offer is the best for their transaction, they will be drawn more to the buyer who has more “skin in the game” with a higher down payment. Putting more money as a down payment may not only give you more equity upfront, but it also might get you the home you want when other people are also wanting it!
The Upside of a Small Down Payment
The national average for home appreciation is about five-percent and it is independent from your home payment. Whether you put down 20-percent or 3-percent, the increase in equity is the same. If you are looking at your home as an investment, putting down a smaller amount can lead to a higher return on investment while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities. This will allow you to avoid becoming “house poor” as soon as you leave the closing table.
In addition, with a small down payment, you can buy a home sooner because you do not have to save as long before you get into a home. It can allow you to secure a loan at today’s low rates. If you do not have enough money saved for a large down payment, you can also look into a down payment program for assistance. These programs can help add to your down payment savings or even provide a tax credit for the life of the loan.
The Downside of a Large Down Payment
Although it is often recommended to put down 20-percent for a down payment, there are also downsides to doing so. For example, a large down payment can decrease your long-term costs, however, it can cause a short-term financial crunch if you are putting all of your savings into your new home. You may want to have the freedom to buy a few extra things to make your new home special and you may not be able to do so if you put all of your available funds towards your down payment.
The Upside of a Large Down Payment
We briefly mentioned that a 20-percent down payment will allow you to avoid having to pay private mortgage insurance. A large down payment will also allow you to make lower monthly payments on your home, possibly saving you hundreds of dollars per month. Having a large down payment will also allow you better budgeting options. If you have a lot saved up for your down payment, you will not have to worry as much about keeping your home within a specific budget.
The Happy Medium
Of course, your home payment options are not binary. Most borrowers can find common ground between the security of a traditional 20-percent down payment and an investment-focused, small down payment. The right down payment for you depends on your personal situation. Michele Harmon Team can help provide you some answers as you explore your financing options. If you have any questions or if you are ready to start your search for your dream home, call Michele Harmon Team at 713-818-1330.
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