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 is solid, as it shows that you have the financial discipline and stability to save for a long-term goal. It also helps you get favorable rates from lenders and prevents you from having to pay mortgage insurance.
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 up front, even if you have the money available. Knowing your down payment options and having the flexibility to put less money down may also help you better compete for a home in this hot sellers market!
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance for years, and the lower your down payment, the more you’ll pay. 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. When sellers receive multiple offers on their home, one of the factors they consider how much the buyer is putting down. A lower down payment may look like a higher risk to the seller.
The national average for home appreciation is about five percent, and more than double that in the current Denver market. 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.
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. If your lender pre-approves you with 20 percent down you might also have the flexibility to choose to put down less in case the appraisal comes in less than the purchase price. Leveraging your purchasing power by putting down 5 percent, 10 percent or another amount might be the right solution for you!
There are Conventional loans with a down payment requirement as low as 3 percent. FHA loans require 3.5 percent down while veterans and active duty military with VA benefits can purchase with $0 down payment. USDA loans are a possibility in certain areas. With mortgage interest rates hovering around 3.0 percent, a lower down payment might make sense for your needs. Your trusted real estate professional and your lender can provide some answers as you explore your financing options. Want to know more? Ask your question in the comments below!