Money isn’t everything, but everything needs money

    Money isn’t everything, but everything needs money

    Nov 01, 2020

    Money isn’t everything, but everything needs money! Have you thought about your down payment?

    An ideal down payment in the eyes of a lender is 20% of the home’s purchase price. By putting down 20%, you don’t have to pay private mortgage insurance (PMI). Putting 20% down can also make you a more attractive borrower. But depending on the price of the home, 20% could be out of reach. In fact, most first-time homebuyers put down less than 10%. FHA loans allow down payments as low as 3.5%. And some Veterans Affairs (VA) mortgages allow for no down payment.

    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.

    CONS

    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.

    PROS

    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.

    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.

    THE HAPPY PLACE

    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.