You’ve most likely heard the rule: Save for a 20-percent down payment before buying 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 be financial benefits to putting down a small down payment—as low as three percent—rather than parting with so much cash upfront, even if you have the money available.
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, eliminating some homes from your search.
The national average for home appreciation is about five percent. The appreciation is independent of your home payment, so whether you put down 20 percent or three percent, the equity increase 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 a traditional 20 percent down payment and investment-focused, small down payment.
Call me today at (623) 295-1600, and let’s discuss your new home plans.