You’ve most likely heard the rule: 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.
But there can actually be financial benefits to putting down a small down payment—as low as three percent—rather than parting with so much cash up front, even if you have the money available. Before working in real estate, I assumed that 20-percent down was necessary to buy a home and that just isn’t the case. Especially when homeowners are gaining equity as quickly as they are today, it may be a great time for you to buy a home even if you don’t have 20-percent saved up yet.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years, and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20-percent down payment, which will eliminate some homes from your search.
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.
THE 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.
Ready to consider purchasing a home? Talk to a lender and get the ball rolling. A good lender can look at your finances and help determine how much you can afford. You may be surprised by what you find!
Northern Colorado has some hard working and reliable lenders ready to help you realize your real estate dreams. Give me a shout to connect you with a lender!