There are many things to think about when purchasing a home. Do I make enough money? Is my credit score good enough? How much do I need to put down to buy a home?
There are a variety of programs with down payment options that come with advantages and disadvantages. Sometimes, putting down 20% has big benefits, but not always. There are some programs that offer zero to very little down. Which is best for me?
Putting less than 20% down on a home:
Advantages:
- A lower upfront investment will get you into a home sooner.
- In hot markets, this could provide a way for you to get into a home and make a competitive offer so that you don’t deal with constantly rising apartment rent.
- If you have more money saved, you still may want to take a lower down payment. This will give you the ability to buy big home items like furniture, or the ability to put some work into home improvement projects.
- If you are a veteran, you can qualify for a VA loan. This program allows 0% down and no private mortgage insurance.
- You can use the extra money to tackle high interest rate debts to lower your overall monthly payments and interest costs.
Disadvantages:
- Lenders look at your down payment as one indicator of the risk involved in your loan. The lower your down payment, the bigger the loan has to be. The more you put out up front, the more you stand to lose by walking away at the first sign of financial struggle, so you’re less likely to default.
- With FHA loans, you’re going to have to pay mortgage insurance premiums (MIP) for the life of the loan no matter the LTV. The MIP increases your mortgage payment and is not tax deductible. With a conventional loan, you will incur MIP if you are over 80% LTV. Mortgage insurance protects the lender in the case you default on the loan.
- The best interest rates don’t automatically go to the borrowers with the best credit score — the size of the down payment makes a difference as well. This higher rate translates into higher monthly payments and more money spent over the life of the loan.
Putting 20% down or more on a home:
Advantages:
- You will get a lower rate because the risk and payment is lower.
- You can afford more house with the same payment.
- With a conventional loan, you will not have to pay mortgage insurance. This will lower your monthly payment.
- The lender is more secure, because with a larger investment you are less likely to default on the loan.
Disadvantages:
- Putting 20% down or more decreases your reserves. It will tie up money that you many need for future home repairs, investments or personal expenses and emergencies.
- If you need to access the equity through a refinance or a sale of the home, it will costs you money.
- There is a link between the economy and home values. Putting a large down payment puts you at a risk to an economic turn. When the economy slopes down, home values sink and you could lose your equity.
There are advantages and disadvantages, but make sure you pick the path that makes the most financial sense for you and your family. If you need to review your plan before purchasing, call our team to help!
By Zarine Torrey, Senior Mortgage Loan Officer
