Which down payment strategy is right for you?
You have most likely heard the rule: save for a 20% down payment before you buy a home. The logic behind saving 20% 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.
There can actually be financial benefits to putting down a small down payment- as low as 3% rather than parting with so much cash up front, even if you have the money available.
The downside of a small down payment are pretty well know. You’ll have to pay Private Mortgage Insurance (PMI) for years, and the lower tour down payment, the more you will pay. You’ll also be offered a lesser loan amount than borrowers who have a 20% down payment which will eliminate some homes from your search.
The national average for home appreciation is about 5%. The appreciation is independent from your home payment, so wether you put down 20% or 3% the increase in equity is the same. If you’re looking at your home as an investment, while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities.
Of course your home down payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20% and an investment focused, small down payment. Your trusted real estate professional can provide some answers as you explore your financing options.