You’ve mostlikely heard the rule: Save for a 20-percent down payment before you buy ahome. The logic behind saving 20 percent is solid, as it shows that you havethe financial discipline and stability to save for a long-term goal. It alsohelps you get favorable rates from lenders.
But there can actually be financial benefits to putting down asmall down payment—as low as three percent—rather than parting with so muchcash up front, even if you have the money available.
The downsides of a small down payment are pretty well known.You’ll have to pay Private Mortgage Insurance for years, and the lower yourdown payment, the more you’ll pay. You’ll also be offered a lesser loan amountthan borrowers who have a 20-percent down payment, which will eliminate somehomes from your search.
The national average for home appreciation is about fivepercent. The appreciation is independent from your home payment, so whether youput down 20 percent or three percent, the increase in equity is the same. Ifyou’re looking at your home as an investment, putting down a smaller amount canlead to a higher return on investment, while also leaving more of your savingsfree for home repairs, upgrades, or other investment opportunities.
THE HAPPY MEDIUM
Of course, your home payment options aren’t binary. Mostborrowers can find some common ground between the security of a traditional 20percent and an investment-focused, small down payment. Your trusted real estateprofessional can provide some answers as you explore your financing options.