There's an old rule and 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 was solid, as it shows that you have the financial discipline and stability to save for a long-term goal. And it gives you equity in the property right away. 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 upfront, even if you have the money available.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance (for both conventional or FHA loans) for years, and the lower your down payment, the more you’ll pay per month. 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 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.
No matter what, make sure you speak with your mortgage rep as they can help guide you to what best fits your needs and wants. They may even have down payment assistance programs that you may qualify for.