“How much should I put down on a house?”
It’s a question that I hear all the time from would-be home buyers— especially first-timer purchasers.
And, the answer is: “it depends,” as it really will vary by buyer.
Per Mr. Green: “If you’re a home buyer with a good deal of cash saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, your loan size shrinks, reducing the size of your monthly payment.”
Or, perhaps your situation is reversed.
“Maybe you may have a good household income but very little saved in the bank. In this instance, it may be best to use a low- or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.”
Dan continues: “One thing is true for everyone, though — you shouldn’t think it’s “conservative” to make a large down payment on a home. Similarly, you shouldn’t think it’s “risky” to make a small down payment. The opposite is actually true.”
“About the riskiest thing you can do when you’re buying a new home is to make the largest down payment you can. It’s conservative to borrow more, and we’ll talk about it below.”
For today’s most widely-used purchase mortgage programs, down payment minimum requirements are:
Remember, though, that these requirements are just the minimum. As a mortgage borrower, it’s your right to put down as much on a home as you like and, in some cases, it can make sense to put down more.
Larger Down Payments Actually Increase Risk
Green continues: “As a homeowner, it’s likely that your home will be the largest balance sheet asset. Your home may be worth more than all of your other investments combined, even.
In this way, your home is both a shelter and an investment and should be treated as such. And, once we view our home as an investment, it can guide the decisions we make about our money.
The riskiest decision we can make when purchasing a new home?
Making too big of a down payment.”
The Higher The Down Payment, The Lower Your Rate of Return
The first reason why conservative investors should monitor their down payment size is that the down payment will limit your home’s return on investment.
Consider a home which appreciates at the national average of near 5 percent.
Today, your home is worth $400,000. In a year, it’s worth $420,000. Regardless of your down payment, the home is worth twenty-thousand dollars more.
That down payment affected your rate of return.
- With 20% down on the home — $80,000 –your rate of return is 25%
- With 3% down on the home — $12,000 — your rate of return is 167%
That’s a huge difference. Please do reach out to me for more information so we can figure out the best down payment strategy for you!