You’ve 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. But there can actually be financial benefits to putting down a small down payment—as low as 3%—rather than parting with so much cash upfront, even if you have the money available.
Pros and Cons of a Small Down Payment
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% down payment, which will eliminate some homes from your search.
The national average for home appreciation is about 5%. The appreciation is independent of your home payment, so whether you put down 20% or 3%, the increase in equity is the same. If you’re looking at your Westfield area 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% and an investment-focused, small down payment. Your trusted Westfield area real estate professional can provide some answers as you explore your financing options.
When you are ready to start your search for your next home in Westfield, Cranford, Fanwood-Scotch Plains or the surrounding area, contact me.