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Is This Your Situation: How Much Money Should I Put Down on a Home?


If you’re shopping for a mortgage right now, chances are you’ve heard a lot of opinions about how much you should spend on a down payment. Many people think that the more you can spend on a down payment the better, but there are some factors at play that may dissuade you from making a large down payment. Keep reading to find out what it really means to make a small or large down payment on a home.

Don’t put down 20 percent or more if it will obliterate your savings 

It’s not a good idea to make a big down payment (20 percent or more) if this will cause you to go broke. Don’t withdraw everything you have in savings to make that down payment. Lenders want to see that you have savings. Also, you need an emergency fund should there be a change in your life, like the loss of a job.

Large down payments tie up your money

If you decide to make a large down payment, know that a big chunk of change is now tied up in this house. If an emergency occurs, it will be hard to get that money back. Also, many new homeowners in particular forget about all the extras that come along with ownership: a boiler or furnace that needs replacing, a sudden roof leak, or even a new refrigerator. Getting cash out of a home is not as easy as putting it in! And there are other costs too, such as the need for a new car.

So don't think that more is always better. This is something to discuss with your bank and your financial advisors.

A small down payment means also paying for PMI

If you want small monthly payments, however, putting less money down will not help you do that. Lenders tack on PMI (private mortgage insurance) if your down payment is less than 20 percent. This is an added monthly cost that you must factor in if you decide to put down a small amount of money on your home.

A small down payment means higher mortgage payments
Plainly put, a small down payment means you will pay a higher mortgage payment each month. If you take out a large loan, the interest rate on that loan will be higher than that on a small loan. If you plan to make a small down payment, know that things like PMI and higher interest rates will be a part of your future. 

Look into loans that allow small down payments with no PMI

Government-backed loans like the VA loan, FHA loan and USDA loan all allow you to put very little down, but don’t require PMI. (However, there may be other kinds of insurance.) Look into the qualifications before applying for one of these loans – there are income and location restrictions. 

Deciding how much to spend on your down payment is not straightforward; it depends on the person and the situation. And bank and government policies can change quickly. For help deciding how much you should pay on a down payment, give us a call today.

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The information provided in this email newsletter is for general guidance only, and does not constitute the provision of legal advice, tax and accounting advice, real estate investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional real estate, tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Home value estimate calculators provided herein are general estimations based on publicly available data and should not be used as a substitute for a professional appraisal. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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