Buzz
The typical down payment for a home is between six and 11 percent, with some buyers paying as little as three to percent. However, some individuals may have the chance to put down more than the usual 20 percent. Should they take advantage of this opportunity?
It might appear appealing, as a home is likely the largest expense you'll face in your lifetime, and having smaller payments and a reduced loan balance is tempting. But just because you can doesn't necessarily mean it's the best choice.
“It all depends on your comfort level with having less cash available,” explains Jason Bateman, head of Redfin Mortgage. “If putting down a larger amount reduces your ability to manage unexpected costs, it could create problems down the road.”
Mat Ishbia, president and CEO of United Wholesale Mortgage, shares a similar sentiment, stating there's little benefit in putting down more. “It’s like burying the money in your basement—you can't get it back,” says Ishbia. “While you avoid mortgage insurance, you lose $15,000 from your available funds.”
“The amount you decide to put down is a personal choice and depends on what other opportunities you have to invest that extra money,” says Erin Lantz, VP and GM of Mortgages for Trulia. “If you change your mind and decide to pay off your mortgage sooner, you can always do so later.”
The first point is crucial: You might achieve a higher return by investing that “extra” cash in a higher-return investment over time, rather than putting it directly into your home or paying off other debt, like student loans. Consider this example from Garden State Home Loans:
If you, as the homebuyer, choose to put 30 percent down on a $250,000 home instead of 20 percent, you’re paying $25,000 more ($75,000 down versus $50,000). Now, imagine if you invested that $25,000 in the stock market today. At a modest six percent annual return (the average annual return over the past few decades is seven percent), that initial $25,000 would grow to nearly $144,000 over 30 years.
One scenario where this might make sense: If you’re looking to finance a larger or more expensive home but can only afford a specific monthly payment. Paying more upfront could help make that possible.
However, having access to your funds is vital in a home-buying situation, as there will likely be numerous unforeseen expenses, as we discussed yesterday. You’ll want the flexibility to manage these costs and still have enough left to comfortably budget and maintain a fully-funded emergency fund.
