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.
