Have you started to save for a home, and you’re wondering about the difference between a small down payment and a large down payment? Let’s get into it.
WHAT IS A DOWNPAYMENT?
Let’s start by explaining “down payment” in simple terms.
A home purchase is made of two components:
- Money you’ll borrow. This is your loan.
- Money that’s yours. You are not borrowing it. This is your down payment.
A downpayment is not another loan nor a credit card, it is actually cash you have in your accounts.
Let’s say you’re buying a 700k home and you want to do 10% downpayment. The bank will contribute a loan of 620k, and you’ll bring in 70k cash. These two numbers together, complete the 700k purchase. Downpayment is liquid money that YOU pay upfront when buying a home.
RANGE OF DOWN PAYMENTS
Down payments can range from 3% to 20% of purchase price.
Yikes! That’s a huge range.
That’s why we’re talking about it today!
To put it in perspective:
3% down payment on a 700,000 purchase is $21,000.
20% down payment is $140,000.
That’s a difference of $119,000
The big question is: should you save up the 21k and hit the ground running, or should you wait to save the full 140k?
The answer is: it depends on what’s important to you. Do you want to save money upfront or in the long run?
Let me explain.
The size of your down payment will affect your monthly payment. Think of down payments and monthly mortgages as two sides of a see-saw. If your downpayment goes up, your mortgage goes down. If your down payment goes down, your mortgage goes up.
Let’s use 700k as an example:
Small Down payment
A 3% downpayment is 21k on one side of the seesaw, that’s pretty low. But, the monthly principle and interest (assuming 6.5%) is 4,291.74
Large Down payment
A 20% downpayment is 149k, but the monthly principal and interest is is 3,539.58
That’s a savings of $702.16 on a monthly basis if you go with large downpayment. Nice! You saved money in the long term.
However…if you take the higher mortgage you saved $114,000 upfront by doing a smaller downpayment! Also nice!
It depends on what matters most to you, saving money upfront or saving money in the long term.
Here are some other things to consider:
With 20% downpayment you pay no mortgage insurance
Anything less than 20% adds the cost of mortgage insurance on top of the principle and interest payment we say. For a 700k it will be an additional $300 – $400 per month
GET IN THE GAME SOONER
A smaller down payment will allow you to buy a home sooner and start building equity. This can be a very smart move, especially if your rent payment each month is similar to what your mortgage would be.
If you already have a good sized savings going, a smaller down payment will ensure you have extra funds in case of emergencies. You can also use those funds for repairs on your home if you want to focus on remodeling.
When it comes to how much you should put down on a house, there isn’t one right answer for everyone. It really comes down to your personal financial goals and where you are in your life.
Here’s my opinion: As long as the monthly payment isn’t stretching you too thin, jump in the game as soon as you can, even if it’s with a smaller downpayment.
The sooner you start, the less you’ll pay because real estate prices trend upward in the long run.
Once you’re in the home you refinance down the line for all the benefits of a 20% downpayment
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