If you're on a Galaxy Fold, consider unfolding your phone or viewing it in full screen to best optimize your experience.
If you’re buying a home, you probably can’t afford to purchase it outright. Rather, like most people, you’ll put some money down on that property, and you’ll get a mortgage to cover the rest. The question is: What should your down payment be?
Many financial experts will tell you that to buy a home, you’ll need to come up with a 20% down payment. And that’s not bad advice. But it’s also not a must.
First of all, you can purchase a home for as little as 3.5% down with an FHA loan, if you qualify for one. Even if you get a conventional loan, you can get still away with not putting down 20%. However, if you make a down payment that’s lower than that, you risk getting stuck with private mortgage insurance, or PMI.
PMI is typically paid as a premium that’s tacked onto your existing mortgage costs. Its purpose is to protect your mortgage lender in the event you’re unable to keep up with your mortgage payments. And it can be costly, easily totaling 1% of your loan amount. On a $400,000 mortgage, you’re potentially looking at $4,000 a year in PMI costs, which is why it’s often a good idea to come up with that 20% down payment at the time of your closing.
Another benefit of putting down 20% of your home’s purchase price? You’ll build equity sooner. Equity is the percentage of your home you own outright, and the more you have, the better, since you can borrow against that equity when you need money.
That said, if you can’t swing a 20% down payment, but have enough income to afford your mortgage payments plus PMI, you may be just fine putting down less. You might live in a housing market where prices are inflated. Or, you may be embarking on a new, lucrative career, like medicine or law, but don’t have much money for a down payment because you’ve spent the past few years in school. As long as you can swing PMI on top of your mortgage (plus the general cost of maintaining a home), there’s nothing wrong with going that route and owning sooner rather than later.
The same holds true if you’re looking to invest in real estate. You may not have enough money to put 20% down on an investment property, but if you can afford the monthly payments associated with owning it, there’s no reason not to move forward. Besides, if that property does well and you’re able to generate a substantial amount of rental income, you can use that money to cover your higher mortgage costs, or pay into your mortgage so that eventually you’re able to cancel your PMI.
Many people struggle to come up with 20% of their home’s purchase price. But what if you’re in the opposite boat, and you have the money to put down a higher percentage?
The benefit of making a higher down payment is that you'll lower your monthly mortgage costs and limit the extent to which you spend money on interest on your home loan. You'll also build equity in your property sooner.
But before you plunk down a larger chunk of cash for your home, ask yourself whether you might need that money for other things. The more money you put down up front, the less you’ll have in the bank for home maintenance and repairs, which, over time, can get quite expensive. Furthermore, if you make a larger down payment, you’ll have less money on hand to invest, or to use for other important goals, whether it's paying for your wedding or shedding your student debt.
If the interest rate you get on your mortgage isn’t particularly favorable, then it might pay to make a larger down payment. But if you’re able to snag a low rate, it might make more sense to go with the traditional 20% and keep more of your cash on hand.
Ultimately, the down payment you make on your home will be a function of how much you have in savings and what you might otherwise need the money for. It’s OK to go with the standard 20% down payment, and it’s also, in some circumstances, OK to put down less or more. The key is to think about your financial circumstances and goals, and determine what makes the most sense.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team. The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2022 The Ascent. All rights reserved.