When buying property, you can often choose between a large or small down payment. That upfront payment becomes your equity in the property, but how much should you put down?
Some loan programs allow you to pay as little as 3.5% (or even less), which may be tempting to buyers who prefer to keep their cash handy. Before you make a choice, evaluate the pros and cons of skimping on the down payment.
Advantages of a Big Down Payment
If you’re hesitant to put spare cash into a property, it may help to review some of the benefits of a sizable down payment.
- Pay less interest: When you put down more, you borrow less, and a smaller loan balance results in lower interest charges every month. By reducing interest costs, you effectively minimize the amount you pay for your property.
- Lower monthly payment: If the monthly payment is important to you, a down payment can help you secure a lower payment. Loan payment calculations are based (in part) on your loan balance, and a manageable monthly payment buys you flexibility for life’s surprises. Plus, you can keep cash flow free for other goals like another property, education funding, retirement savings, or vacations.
- Easier to qualify: When you’re having trouble qualifying for financing, bringing more money to the table may help. A healthy down payment enables you to meet lender criteria like minimum loan-to-value ratios. You may be able to qualify with a small down payment as well (VA loans might work with zero down, for example), but a significant down payment gives you more options to choose from. Additionally, putting down at least 20% could help you dodge private mortgage insurance (PMI).
- An equity cushion: With equity in your property, you have a buffer against life’s surprises. If you need cash, you might be able to access funds with a second mortgage. What’s more, when it’s time to sell, there’s even less chance that your home will be underwater (ideally, that won’t be an issue), and you have more assets to put toward your next property.
The Appeal of a Small Down Payment
Putting down a substantial amount might be great when you have the resources and want to minimize risks. But it’s not necessarily unwise to make a small down payment. Ultimately, the best choice depends on your circumstances and how the future unfolds. There are several reasons to favor a small down payment.
- Keep cash available: Instead of putting money into your property, you may prefer to have cash available for home improvements, furniture, running your business, or other needs.
- Buy sooner: Saving enough for a 20% down payment could take a while. Starting with a small down payment allows you to buy earlier, and you can build equity by making monthly payments over the years.
Which Is Best?
Only you can decide how much to put down. Speak with the excellent real estate agents on the Atha Team as well as your mortgage lender to understand the options available to you. Then, evaluate the pros and cons, and make a decision that works best for you.
Justin Pritchard, CFP® at Approach Financial, Inc. is a fee-only financial advisor in Montrose, CO.
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Copyright 2019-2021 Keller Williams Colorado West Realty, LLC and Justin Pritchard at Approach Financial Inc. If you have a brokerage relationship with another agency, this is not intended as a solicitation. Equal opportunity housing provider. Each office is independently owned and operated. For sale by owner data not included in research findings. Sales data reflects sales from homes not limited to the Atha Team LLC. This information was gathered from Keller Williams, The National Association of Realtor, CoreLogic data analysis firm, Montrose Association of Realtors, and the Mortgage Brokers Association. This data is considered accurate, but is not guaranteed. Copyright Atha Team LLC 2019-2021. All Rights Reserved.