One of those big, fat decisions when you buy a house is: How much money should you put down?
A decent-sized down payment will reduce your monthly mortgage payments and will protect you from additional costs. But hey, maybe you just don’t have the cash.
Here’s the lowdown on down payments:
Low down payment, higher costs
Make a lower down payment, and you’ll face higher monthly mortgage payments.
How come? Several reasons. The first is just simple math: If you put up less money now toward the price of the house, you’ll need to borrow more and will have more of the cost to pay off.
Next, loans with lower down payments usually come with higher interest rates.
Finally, a big reason is something that’s often dreaded called private mortgage insurance, or PMI.
Benefits of a 20% down payment
Lenders love it when you can make a 20% down payment, because that makes the mortgage a good risk. The lender believes it would have no trouble recouping the other 80% if you ever default on the loan and fall into foreclosure.
Calculate what your monthly mortgage payment would be with a 20% down payment.
If you don’t want to put that much money down, the lender make you buy PMI. It’s insurance that pays off the loan if you ever stop paying. PMI can be expensive, and the premiums are tacked onto your mortgage payments.
Some types of mortgages — including VA loans — allow for low down payments with no PMI.
Risks of a higher down payment
But making a high down payment isn’t necessarily the smartest choice.
A big chunk of money will be tied up in your home. You won’t have an easy way of getting at that money if you’re suddenly slapped in the face with a major unexpected expense and don’t have an emergency fund to deal with it.
When you make a hefty down payment, there’s also a chance you could lose that money completely.
If you’re ever foreclosed on, the down payment will never be returned. Or, if you have to sell the home for less than you paid, you might not recover your down payment.
What should you do?
Personal finance is just that: personal. There is no right or wrong answer to how much of a down payment should be made.
You have to weigh all the pros and cons and decide what would work best for you. A trusted financial adviser might help you make your choice.
Published in MoneyWise by Doug Whiteman, 03/18/2019