Learn about down payment strategies

 

“How much should I put down?”

Many home buyers – especially those applying for a mortgage for the first time – have questions about how much money they should put down on their new home. While traditional advice tells us 20% is the minimum amount for a down payment, modern lending practices and a wider variety of loan terms have made varying down payment amounts possible. Whether you only have a small amount saved or can pay for most of a home in cash, the following down payment strategies can help you when purchasing your next home.

Down payment minimums

The minimum amount required for a down payment varies by lender and loan type. Likewise, other factors such as credit history, credit score, or residency or immigration status can affect the down payment requirements on a home. For many of the most commonly-used loans, the down payment requirements are:

  • Conventional loan with PMI: 3% minimum
  • Conventional loan without PMI: 20% minimum
  • FHA loan: 3.5% minimum
  • VA loan: No down payment required
  • HomeReady loan: 3% minimum
  • USDA loan: No down payment required
  • Jumbo loan: 10% minimum

As long as buyers can meet the minimum requirements for their loan, the amount they choose to put down becomes a personal decision affected by a number of different factors.

Down payment amounts and mortgage rates

In many types of loans, the amount you choose to put down can affect the interest rate of the loan. Under new FHA mortgage insurance rules, for example, putting down 3.5% comes with a mortgage insurance premium of 0.85% annually. Putting down 5%, however, lowers the mortgage insurance premium to 0.80% annually.

Risks of making a large down payment

Making a large down payment can help significantly reduce your monthly mortgage payment. However, there are a number of risks associated with making a large down payment that should be considered.

  • Lower rate of return. A home appreciates at the same rate – no matter the down payment amount. Putting a larger sum down lowers the overall rate of return on investment.
  • Fewer liquid assets. Putting a large amount down converts that money from liquid, or readily available, asset to an illiquid, or difficult to access, asset. While the home has more equity, it can be difficult and time consuming to get that money back in the event of a financial emergency.
  • Changes in the housing market. Buyers who put down a large down payment are more at risk to changes in the housing market. Significant drops in home value can impact equity built through a large down payment.

Benefits of a large down payment

In most cases, a larger down payment helps you afford more house with the same monthly payment. For example, a family who is approved for a $300,000 mortgage and wants to put 5% down can afford a house that is $315,000; by increasing their down payment to 20%, they can afford a house that is $360,000.

Those putting a large amount down on their home can improve liquidity with a home equity line of credit; a HELOC doesn’t cost money until it is borrowed against, so homeowners can use it as a financial safety net in case of emergency.

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