Getting ready to buy your dream home can come with two less dreamy words: down payment.
For years, the standard guidance has been “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.
However, there can actually be financial benefits to putting down a small down payment—as low as 3 percent—rather than parting with so much cash up front, even if you have the money available.
Downside
The downsides of a small down payment are pretty well known. You’ll have to pay PMI (private mortgage insurance) for years, and the lower your down payment, the more you’ll pay. You’ll also be offered a lower loan amount than borrowers who have a 20-percent down payment, which will likely eliminate some homes from your search.
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.
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.