How much cash should a buyer use as a down payment and how much of a loan should they apply for?
Well, there is no straight answer to this question. There are several factors that affect the down payment,
such as the type of loan you are applying for, your income, your available cash, to name a few. It also
depends on your long term goals for the home you are buying. Here are a few things to think about:
- 20% Down - The benefits to putting 20% down are fairly straightforward. First, by putting 20% down,
you borrow less which means you repay less. Second, you will not have to pay private mortgage
insurance (PMI) on the loan, effectively saving you $40 to $70 a month.
- Less than 20% Down - This is a more common option for first time buyers. Many loan programs offer
buyers the ability to purchase a home with as little or no money down. This allows you to conserve
your cash for other expenses. The flip-side to putting less than 20% down is that lenders will require
you to pay private mortgage insurance (PMI). PMI is a monthly fee that the borrower pays if the loan
exceeds 80 percent of the purchase price. Since a lower down payment results in a statistically higher
risk to the lender, PMI insures a portion of the loan to reduce the risk to the lender. There are ways to
put less than 20% down and still not have to pay PMI. You'll want to check with your lender for these
options to see if one is right for you.
- Monthly Payment "Comfort Level" - This is probably the most important issue that will dictate how
much cash you put down. If you have good credit and a solid income, most lenders will qualify you for
a loan amount larger than you would ever want. Before speaking with a lender, take a good look at
your personal finances and spending habits. Be sure to include all of your expenses, from the utilities
to dinner and a movie. Then decide just how much you are willing to pay for a home each month.
- Taxes - It is important to understand the benefits of mortgage interest and the real estate tax
deduction. Since you will own the home, you will be able to deduct all the interest and taxes you pay
on the property. Consult a tax expert to gain an understanding of how much of a tax break you will
receive. This will also help you decide a comfort range for your monthly mortgage payment.
- Opportunity costs - Ask yourself this question: What am I giving up by putting 20% down? If the
purchase price of your home is $350,000, are you going to miss $70,000? What is that money
currently doing? Is it earning a good rate of return? Will you have to sell securities and pay capital
gains taxes to liquidate that money? Be sure to investigate the true costs associated with a large down
payment.
- Other debts - Do not forget to consider any other debt you may have. For example, if you are
carrying substantial credit card debt, it would probably be better to pay the cards off instead of putting
down a large down payment. Or perhaps you only owe $10,000 on your automobile. It would be better
to pay off the car, and put the difference towards the down payment, thereby eliminating another
expense.
Ultimately, the decision on what amount to put down will be up to you. Consider this a step in the right
direction. There may be other factors to consider, so think carefully. When in doubt, talk to friends or
relatives that have purchased homes. They may be able to provide you with additional insight.
|
