Do you have the cash to make a 20 percent down payment on the home you wish to purchase?
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, and can advance your offer in the eyes of sellers when compared to offers where purchasers will be borrowing more .
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.
Smaller down payments will cost more in the short-run.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance — protection to your lender— until your payments cover 20% of the purchase price, 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.
But it could have long-term return.
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.
Weigh the options with your lender; a happy medium might be the answer.
A good mortgage broker or knowledgable lender can outline the best option based on your needs and plans. Most borrowers can find some common ground between the security of a traditional 20 percent and an investment-focused, small down payment.
The Red Rabbit Team can suggest options for lenders and mortgage brokers that have served clients well in the past. Let us know if we can help!