Published March 17, 2020
WHICH 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, 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.
But
there can actually be financial benefits to putting down a small down
payment—as low as three percent—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. If you’re 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.
THE HAPPY MEDIUM
Of
course, your home payment options aren’t binary. Most borrowers can find some
common ground between the security of a traditional 20 percent and an
investment-focused, small down payment. Your trusted real estate professional
can provide some answers as you explore your financing options.
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