What is the Right Down Payment?
This has probably been the most consistently common question I have received from new and prospective clients over the last nearly 15 years that I have been in this industry. There have always been differing opinions about how much to put down on a new home purchase, some arguing for larger down payments, others arguing for smaller down payments. There is also a lot of misinformation out there about what a down payment is, and what it is not. And with the explosion of the internet, anyone with an internet connection can voice their opinion, even with no experience in the industry.
So with all that said, I understand why so many people ask me this question. Unfortunately, there is no right answer to this question. There was a time when it made sense to put as much down as you could, back when interest rates were in the 7-8% range (or even 10%+ range in the 1980’s), because you were avoiding a large amount of interest. And I think the concept of paying down as much as possible has survived from those times, even though interest rates today are below 4% for most conventional mortgages.
What I would argue, however, is that with the rates as low as they are, you could put your money to use in other areas and earn far better returns over the next 30 years. If you add in any tax benefits you may receive on mortgage interest, it becomes clear that larger down payments aren’t always the best bet.
That being said, you want to be cognizant of mortgage insurance. If you go FHA, regardless of the down payment (which can be as low as 3.5% of the purchase price) or if you go conventional with less than 20% down, then you will have an additional cost every month in the form of mortgage insurance. This is an extra cost that is only partially deductible and eats away at potential gains on your money. In the case of conventional mortgages, the insurance does eventually go away (in as little as 24 months), but with FHA the insurance remains for the life of the loan.
You also do not want a mortgage you can’t handle paying. Who cares if the rate is 1% and you can make 20% on your money if you can’t afford your monthly bills? You will be constantly tapping into your investment and potentially realizing losses from it.
So in summation, the best down payment is the one that makes sense for you. And really the only way to know that is by talking with a qualified mortgage officer who can help you understand what you qualify for, what your payments will look like, and what an appropriate down payment will look like.
If you have any questions about down payments or need to get prequalified for a mortgage, please contact me. If you have anything to add about down payments and how much to put down, please leave a comment.