Choosing a Down Payment Strategy

Dated: 06/03/2020

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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.

THE DOWNSIDE

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 UPSIDE

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. Your trusted real estate professional can provide some answers as you explore

your financing options.

Blog author image

Julie Bowes

As the closing coordinator for HG Agents, Julie coordinates all of the details from the time your home goes under contract, until the time it closes. She makes sure all dates are met, I’s are dotted....

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