When it comes to putting money down on a home, the standard school of thought is to put down at least 20 percent. What happens to those people that don’t have that amount? Or those people that do not want to invest that much into their home? There are a variety of programs available that allow you to put down as little as no down payment to as much as you want, making the decision one that you have to make on your own.
What does 20 Percent Down Payment Do?
Generally, a 20 percent down payment helps you avoid Private Mortgage Insurance. For some people, this might be a good idea.
If you have the 20 percent to put down without putting yourself in any type of financial bind, it can make sense because you are spared the expense of extra insurance every month until you hit below an 80 percent loan-to-value ratio.
If you do not have the 20% down payment for your home, however, you can still get a loan and have to pay the PMI; your payment will just be higher.
The Downside of a Large Down Payment
There are downsides to every scenario when it comes to taking out a mortgage, but one of the largest downsides of putting down a large down payment is the lack of liquidity you have once you give your money towards the home. The money now becomes a part of your home equity, which is a lot harder to tap into than something like your checking or savings account. It might even be different than many other investments you make because you have to refinance the home and go through an entire process before you can get the money back and sometimes you cannot even do that, which means your money is tied up until you sell the home.
The Downside of a Small Down Payment
Many programs allow you to put very little down on the home purchase. These programs include VA, FHA, and even some subprime programs.
FHA loans require you to pay mortgage insurance no matter what type of down payment you put down and conventional loans always require PMI if you put down less than 20 percent.
The largest downside, however, is the fact that your mortgage payments will be much higher, which means it could take you longer to pay off the home.
Making the Right Down Payment Choice for Your Home Purchase
So how do you decide what is right for you? There are several factors to consider:
- The amount of money you have in the bank – Will the down payment clear your bank account completely or will you still have some emergency reserves in the event that you need them?
- The value of the homes in the area – Inquire about the history of the value of the homes in the area. Have they dropped a lot recently or have they remained steady? If the values dropped, you might not want to invest a large amount of your own money at this point.
- The amount of the mortgage payment you can handle – If you find that your mortgage payment is going to be too high with a small down payment and you have the ability to put down more money and have a lower payment, then it might be the right choice for you.
As you can see, there are many different scenarios to consider when determining the right down payment for your home. Weigh the options of every program available to you including FHA, VA, conventional, USDA, and Home Ready.
When you see the various payments and the amortization tables, you can determine the right choice for you.
