Real Estate News

Three Percent Or 20 Percent - Which Is The Smarter Down Payment Strategy?


Written By: Jaymi Naciri
Thursday, August 17, 2017

The minimum down payment on an FHA loan is 3.5 percent, which makes it a popular choice among those who dont have the funds for a large down payment and also those who dont meet the higher credit score requirements for other types of loans. And thats not even the lowest you can go. Loans like this one require only three percent down, and if youre a veteran or are buying a home in a rural area, you may be able to buy a home for nothing down. But should you go that low just because you can, or are you better off making a larger down payment? Were breaking 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 loansas long as you have the credit score to support it.
  • Youll have built-in equity as soon as you move in.

    You can avoid paying private mortgage insurance PMI.

  • Its 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 homeowners monthly payment, and it can be hard to get rid of it. "If you can put 20 down and avoid PMI, that is ideal, said certified financial plannerSophia Bera on Business Insider.

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? "The good news is a first-time buyer can purchase a home for a little as three percent down - and even no money down in some cases," said U.S. News.

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, theres that pesky PMI again, which, for many first-time buyers, pushes their monthly payment to a level theyre 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," they said.

You may also have trouble qualifying for a loan even if you have a high enough credit score because you dont 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.

But, on the flip side, a smaller down payment will up your rate of return, said The Mortgage Reports. "Consider a home which appreciates at the national average of near five percent. Today, your home is worth 400,000. In a year, its worth 420,000.

Irrespective of your down payment, the home is worth twenty-thousand dollars more. That down payment affected your rate of return. With 20 percent down on the home - 80,000 - your rate of return is 25 percent. With three percent down on the home - 12,000 - your rate of return is 167 percent."

Even when you add in the PMI and a higher interest rate, the equation comes out in favor of the lower down payment. "With three percent down, and making adjustments for rate and PMI, the rate of return on a low-down-payment loan isstill 106 percent - much higher than if you made a large down payment. The less you put down, then, the larger your potential return on investment."

The case for somewhere in between

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 dont do it I would much rather see people put five percent down, wipe out all their other debt with cash, and still have three months of emergency savings versus putting 20 percent down on a house," said Bera.

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. Its important to consider all of the costs and not just compare the monthly mortgage payment to your current rent amount," she said.

Another thing to consider when evaluating how much you should put down is what would happen if you had an emergency. Its 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.

"Afinancial eventcan leave you wishing you had access to the money without selling," said The Mortgage Reports. "Say you lose a job for three months. An extra 20,000 would be a nice safety cushion. And, if you lose your source of income, you cant take home equity out via acash-out refinanceorhome equity line of creditHELOC. Lenders wont approve a new loan to someone between jobs. In short,the more you need to get at the money, the less access you have to it."

Copyright© 2017 Realty Times®. All Rights Reserved

 

Map SearchClick here for a free Market AnalysisBuyers: Search here for your Dream HomeSubscribe! Sign up to recieve our Newsletter!Real Estate Outlook
Facebook linkedin twitter youtube googleplus
Updated: Thursday, August 17, 2017


How To Simplify Your Next Move

When youre selling your home, getting your belongings organized can seem like a low priority. Youre dealing with finding the right real estate agent, the best time to list your home ...
> Full Story

New Advances In Technology Make Going Green A Breeze

Did you know that an automatic dishwasher uses less hot water than doing dishes by hand, which equals an average of six gallons less per cycle, or more than 2,000 gallons per year? C...
> Full Story

How Do You Know If Your Moving To A Diverse Neighborhood

A family I know moved from California to Texas recently to take advantage of a new job opportunity. As they set out to buy a new home in their adopted North Texas city, the questions...
> Full Story

Escaping Condo Jail
Question: The president of our condominium association acts alone and has previous members of the board on the bank account of the Association. He has been on the board for over ...
> Full Story

4 Tips for Keeping Your Rental Property Secure

Burglaries are a concern for all home owners, but for landlords, they are an even bigger risk. Households living in rental properties experience burglaries at a higher rate than othe...
> Full Story

Savvy Buyers Search Out Visual Disasters

Instead of shopping for your dream home, why not search out your dream discount?

First-time buyers can be distracted by the superficial. They can be enticed to pay for dream-home f...
> Full Story

Seller Cancellation Must Be Done By The Book

Breaking up is hard to do. So is cancelling a California real estate purchase contract. Especially if you are the seller. That is why, a little over a year ago, the legal department ...
> Full Story

Clever Ways To Create More Storage In Your Kitchen

Who doesnt need more storage in the kitchen? You may not have a massive space with dozens of cabinets and yards of countertops, but that doesnt mean you dont have the space you need ...
> Full Story

Introducing Your New Color Obsession

Is it gray? Blue? Green? Its all of them wrapped up in your new color obsession, and its going to have you running to Home Depot for a can or 10 in 3hellip;2hellip;1. Behrs first-eve...
> Full Story

What to Do With That Spare Wall In The Kitchen

Does your kitchen have a wall or a nook thats too far away from the action to be part of the work zones but could be perfect for something? The question always is what. These designe...
> Full Story



Copyright ©2017 - Realty Times®
All Rights Reserved.