How much of a down payment should you put out?

How much of a down payment you make on your new home is a complicated decision that requires a lot of careful thought. Some advisors advocate making lower down payments up front, with one of the main arguments being that you can afford a more expensive home this way, but compelling arguments can also be made on the other side. There’s no cut-and-dried answer to how much you should put down, but here are some points to consider:

Federal Housing Administration (FHA) loans

The Federal Housing Administration requires home buyers put down a minimum 3.5% down payment. That certainly makes an FHA loan an attractive option for home buyers, with Mortgage 101 explaining that even borrowers with bad credit may qualify, even if you have a past bankruptcy, as long as it’s been two years since your discharge.  However, there are drawbacks to FHA loans, with money management website The Balance noting that “the main drawback is that the upfront mortgage insurance premium and ongoing premiums can cost more than private mortgage insurance would cost.” They suggest those with better credit scores shop around first.

 

Minimum down payments

Outside of FHA loans, the benchmark for a mortgage down payment is typically 20%. However, if you can’t make this size of down payment, that doesn’t mean you can’t get a mortgage, although you will have to carry Private Mortgage Insurance (PMI). A report on Zillow.com explains that this offsets the risk to your lender, although you’ll have to pay premiums until you’ve built up enough home equity to meet the 20% down payment. Zillow also suggests “piggybacking,” meaning taking out a personal loan to make the 20% down payment as a way to avoid PMI.  Paying the 20% benchmark can have its drawbacks if money is tight, with The Balance warning against having all your money tied up in something that could be tough to sell.

 

Higher down payments

However, making the hefty 20% down payment has many advantages to consider. For one thing, you’ll save on the PMI. Another, as noted on the Wealth Pilgrim Financial Blog is that a larger down payment protects against the price declines that affected so many during the housing crisis, which left many buyers stuck in homes they couldn’t sell because the new price fell below the mortgage balance.  Of course, if you can make the benchmark payment, you’re more likely to get approved, and your repayment terms may be more favorable, allowing you to pay off your mortgage earlier and faster.

 

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