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 lending professional can provide some answers as you explore your financing options.
Once you know which is right for you, contact me so we can find your dream home!
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