SHOULD I PUT A LOW OR HIGH DOWN PAYMENT ON MY HOME

SHOULD I PUT A LOW OR HIGH DOWN PAYMENT ON MY HOME


The minimum down payment on an FHA loan is 3.5 percent, which makes it a popular choice among those who don't have the funds for a large down payment (and also those who don't meet the higher credit score requirements for other types of loans). And that's not even the lowest you can go. Some loans are as low as 3% down,  and if you're a veteran or are buying a home in a rural area, you may be able to get into a home for next to nothing down. But should you go that low just because you can, or are you better off making a larger down payment? Let's break it down.

The case for 20 percent

There are several advantages to putting down 20 percent when buying a home, like:

  • Since the bank will generally consider you a lower risk because you have "more skin in the game," you may be able to get a lower interest rate than you would with other types of loans—as long as you have the credit score to support it.

  • You'll have built-in equity as soon as you move in.

    You can avoid paying private mortgage insurance (PMI).

  • It's that last part that drives a number of people to strive for that 20 percent down payment since PMI can add several hundred dollars to a new homeowner's monthly payment, and it can be hard to get rid of it. "If you can put 20% down and avoid PMI, that is ideal!

The case for as little down as possible

The biggest roadblock to homeownership for many people is coming up with the down payment, so minimizing that expense sounds great, right? 1st time home-buyers have options for low to zero down payment options!

But is that a smart move?

"The less you put down, the higher the mortgage insurance is," Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and a mortgage professional in the San Francisco Bay Area, told them. "With five percent down, the mortgage insurance is quite high."

Yep, there's that pesky PMI again, which, for many first-time buyers, pushes their monthly payment to a level they're not comfortable with. Another bummer about PMI: If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment.

You may also have trouble qualifying for a loan even if you have a high enough credit score because you don't have enough cash reserves; if you are using all your savings for the down payment and the lender questions where the funds for your closing costs, taxes and insurance, and any needed repairs are coming from, you could have a problem.

Finding that balance between down payment and savings is a challenge for many homebuyers, and the sweet spot will be different for everyone depending on their unique circumstances and financial situation. Most financial experts will say that saving and scrounging to get together 20 percent at the risk of depleted savings and zero emergency funds is a shaky strategy, at best.

If putting 20 percent down means that you use all of your savings, then don't do it! 

Especially when you consider all the added costs you may be facing once you buy: yard work, home repairs, renovation costs, property taxes, insurance, etc. It's important to consider all of the costs and not just compare the monthly mortgage payment to your current rent amount.

Another thing to consider when evaluating how much you should put down is what would happen if you had an emergency. It's easy to lose sight of real-life issues that can arise when you are so driven to buy a home and focused on saving the money to get there.

A financial event can leave you wishing you had access to the money without selling.  


Shonna King Headshot
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Phone: 713-518-2203
Dated: August 16th 2017
Views: 258
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