Down Payments
For many home buyers, deciding how much to put down as a down payment can be confusing and challenging.
The right choice for each buyer or investor depends on their individual situation and preferences. Below are four key considerations that all home buyers and investors should think about regarding down payments:
- Down payment options
- Cost of lower down payments
- Benefits of lower down payments
- Personal considerations
The information provided below aims to provoke thought and careful consideration about the various financing programs available. It’s intended to inform rather than push you towards any specific program. It simply outlines the options to consider when purchasing a home or investment property.
Down Payment Options
Let’s review the minimum down payment requirements for conforming loans, as well as some alternatives with non-conventional programs.
For conforming conventional loans, the typical minimum down payment is 3 percent. However, this can vary based on your lender or credit score. But opting for lower down payments on conforming loans comes with a cost: higher mortgage insurance (often called PMI, or private mortgage insurance).
Mortgage insurance is mandatory when the loan amount exceeds 80% of the purchase price (when the down payment is less than 20%). Additionally, the lower the down payment, the higher the premium ratio charged.
With FHA loans, you can purchase a single-family home or condominium with as little as a 3.5% down payment.
Military veterans eligible for a VA loan have the easiest path to home ownership with no money down required. VA loans can offer up to 100% financing for qualified military personnel and veterans.
Cost of a Lower Down Payment
The downside of a small down payment, whether using a conforming loan or a non-conforming program, is potentially higher interest rates and mortgage insurance costs.
Mortgage insurance is calculated based on the loan amount. A lower down payment results in a higher loan amount and increased mortgage insurance payments.
For conventional loans, mortgage insurance can be eliminated once sufficient equity is built. If the property shows at least 20% equity within a few years, mortgage insurance can be removed or refinanced away.
Example: Consider purchasing a $100,000 condominium with an interest rate of 6.50%.
- A 10% down payment results in a $90,000 loan with a payment to $568.86 per month.
- With a 5% down payment the loan amount increases to $95,000 and and monthly payments to $600.46.
Benefits of Lower Down Payments
Despite the drawbacks of low down payments, there are advantages. Take time to weigh both and determine what’s best for you.
Key benefits of lower down payments include:
- Increased cash-on-hand
- Potential for higher rate of return: Property appreciation will be the same regardless of whether you put down 3%, 5%, or 20%
- Opportunity cost: In some cases, investors can earn more from available cash by investing it elsewhere.
Personal Consideration
Carefully consider how much to put down. Calculate the monthly payment you can comfortably afford. While lenders assess your qualification based on income, your comfort level may differ.
Consult with your loan officer to determine the best approach for you and explore down payment options today!
