Myth Buster: "I need a 20% down payment to buy a house."
Many people think the best way to buy a home is putting down as much money as possible upfront. However, we are in a new age of real estate. Interest rates are not nearly as high as they once were.
Depending on your goals, it may actually be BETTER for you to do a low down payment. The reality is choosing a 5% down payment versus a 20% down payment is also a wise choice. We are not taking sides, but shedding light on the fact that a substantial down payment is not necessarily the only responsible option. Keep reading to better understand the pros and cons of greater cash flow versus greater equity as strategies to purchase your new home.
We chatted with our preferred lender, Brittany Wilson, to get her expertise. Hopefully this article and illustration gives you talking points for when you reach out to Brittany for your free consultation.
Let’s use a scenario. There are two buyers looking to purchase a $300,000 home. They are both first-time home buyers and are likely to only stay in their home three to four years. Buyer 1 saved $60,000 for a 20% down payment. Buyer 2 saved $15,000 for a 5% down payment. The interest rate for Buyer 1 is 4.625% versus 4.75% for Buyer 2. This surprises many people who believe lower down payments significantly increase interest rates. That is just not the case these days. Your interest rate is probably only slightly lower with a large down payment. (Depending on the house, it may only be $20-$30 per month lower!)
The biggest difference is that you’ll have to add PMI (private mortgage insurance) in your monthly payment if you do the lower down payment, BUT with a good credit score the PMI is low. It can be as low as $50-$100 per month. Brittany can help give you guidance in bettering your credit score.
See the full breakdown in our table below:
Brittany also shared other advantages of keeping cash on hand. For one, the money you would have tied up in the house could be better utilized paying off other debts (student loans, car payments, etc). Having an emergency fund may help you more rather than tying everything up at the beginning. You can always pay more toward your mortgage per month with no penalty, but you can’t pay less without penalty.
Another factor many first-time buyers don’t consider is all the furniture and updates their new home will need. Most first-time home buyers don’t have enough furniture, so another $5,000-$10,000 is needed for “first year spending” for projects and furniture. Brittany says that it is always better to pay for renovations in cash versus financing it through credit cards or loans.
Then when it comes to appreciation value, it doesn’t make sense to wait years to save up for 20% down payment for your first house. For example, the average home in DFW appreciates at 6%. One year later your $300,000 home is worth $318,000. If you wait too long you miss out on the appreciation value.
We hope this scenario helped demonstrate different payment routes and the outcomes. To continue the conversation, contact our preferred lender, Brittany Wilson of Integrity Mortgage. She’s the best!