What Amount Should I Put Down?
Ask yourself these questions to help determine your priorities. This will help indicate which type of down payment strategy you should choose.
- What are my goals for this home?
- What length of time do I see myself and my family staying in this home?
- How much cash do I have available for a down payment?
- How much money am I comfortable spending for a monthly payment?
The answers should help direct your down payment strategy. Once you know your priorities, a good loan officer will present options that fit your custom goals. Most people cannot tie up $40,000+ of their savings in a home. Life happens and there are many options to fit your current situation. Finding something that supports your situation and long-term financial goals is the key.
The Myths About Needing a 20% Down Payment
The most common barrier we see for people, especially millennials, buying a home is the thought that you should not purchase a home unless you’re putting 20% down. While more money down can be a good thing, the logic is based on the experience of a generation of home buyers that faced much higher interest rates and stayed in homes for 15+ years. Alternatively, mostly due to the advancement of worldwide connectivity, current home buyers are staying in homes for 5-7 years (on average) and are looking at all-time low interest rates.
Opportunity cost is another important consideration — the longer someone waits to buy, the more expensive it becomes due to inflation and appreciating markets. A correlating figure is that the average person spends over $100,000 on rent from age 22-30. That’s cost of living money that is not accumulating any wealth. Moreover, many millennials choose an apartment because of the property amenities and promotional “move-in specials.” The truth is. very few take advantage of the complex features and see a monthly rent spike when it’s time to renew the lease.
Down Payment Comparison Table
|20% Down||10% Down||5% Down||FHA 3.5% Down|
|Term||30 Year||30 Year||30 Year||30 Year|
|Cash to Close||$65,883||$35,888||$20,962||$18,829|
*This is an estimate. Additional terms and conditions may apply.
As you can see, there are multiple ways to own the same home, each scenario with its own pros and cons. The main benefits of putting 20% down are being able to eliminate mortgage insurance (which varies on cost depending on factors such as credit score) and decreasing your monthly payment. The downside for putting 20% down is you are tying up a substantial amount of capital in equity. Also, with the time it takes to accumulate those funds, the market appreciation may price you out of the options you were considering.
Every situation is unique and the path you take should be determined by weighing your immediate needs versus your long-term goals. If you are planning to stay in a home for 5 years, then is it worth it for you to tie up $40,000 or more in equity to avoid paying more per month? Is it worth it for you to wait a few years to save for a 20% down payment on a starter home? Regardless of the outcome, it is worth it for you to explore your options and make an educated decision!