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 when you are ready to buy.
But I have learned 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. Here’s a few things to consider.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance (PMI) 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. Keeping in mind the appreciation of your home is independent from your home payment, remember that whether you put down 20 percent or 3 percent, the increase in your equity is the same. So, if you’re in a position to look at your home as an investment, putting down a smaller amount can lead to a higher return on investment (ROI), 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. Please contact me to discuss strategy, options and questions.