The Down-low on Down Payments

When looking at buying a home, the down payment process can be trying. If you don’t have enough for the 20% down payment, you’re looking at a monthly private mortgage insurance (PMI) fee, and if you do have enough for that ideal 20%, you might eat through your entire savings.

With that in mind, if a loan program allows you to put as little as zero percent down, why would you put 5%, 10%, or even the hefty 20% down instead?

According to Zillow, “The minimum down payment required for a conventional loan is 3%. And the minimum down payment for a Federal Housing Administration loan is 3.5%. Some special loan programs even allow for 0% down payments.”

So what’s the best course of action? Eat away your entire savings to avoid a monthly mortgage insurance penalty, or put down as little as possible to retain your savings?

The low end

Julia Dellitt at Forbes evaluated the homebuying process with 5%, 10%, and 20% down payments. When she did, she discovered the median average for down payments in the United States is just 6%:

"According to a study by the National Association of Realtors, the median down payment for first-time buyers has actually held steady at 6% for the past few years. It makes sense, to some degree: A smaller down payment makes it more possible for people to buy in the first place, keep some savings on hand, and invest in preferred upgrades. At the same time, a large down payment remains fairly attractive to buyers, lenders, and sellers due to lower interest rates, lack of mortgage insurance, more affordable monthly payments, and reduced risk."

One homebuyer Dellitt interviewed explained they purposefully paid only a 5% down payment on their home to retain a savings safety net. The homeowners also knew they would need to replace appliances and furnish a home that was double the size of their previous one, which made a smaller down payment a better option for them.

Casey Bond at Huffington Post listed home improvements as one of the three reasons that paying a 20% down payment isn’t worth it. It’s possible that something was missed during the home inspection or something suddenly needs fixing after you move in, so having all of your money tied into your home right away isn’t the best decision, Bond said.

Michael Nicholas, director of U.S. Mortgage Sales and Service at BMO Harris Bank, suggested the following to Dellitt:

“Some buyers may never be in a position to put down 20%. So, in order to realize the dream of home ownership and start building on what will one day probably be your largest asset, a lower down payment may be your only option. And we all need to have an emergency fund in case the unexpected happens; very few people move into a house and leave it exactly as-is. Having money left over after your purchase is important—if that means putting a little less down, so be it.”

To put it in perspective, 5% down on a $300,000 home is still $15,000. That is a decent chunk of change. If that is all a prospective homeowner can put down at the time of purchase to feel comfortable with their decision, that’s OK. Obviously, the 20% down rule can’t apply to everyone.

The middle

The homeowners Dellitt interviewed who put 10% down did so because they could afford to do so while still having some money left in their savings. They told Dellitt they were comfortable with that amount ,and knew, based on their down payment, what their mortgage would be.

If you have the option to put down more toward your home, it’s a good idea, as it means you aren’t likely to spend the money elsewhere, banker Corey Vandenberg told Dellitt.

“And the more you put down, the less mortgage insurance you could be paying, either as an amount or in the length of time you are paying it,” he added. “Depending on the lender and your credit, it can open a whole new range of loan products for you—more money down opens current and future doors to tap your equity. Since a home equity loan or line of credit is based on equity, it would be nice to have that as soon as possible for a host of reasons, including [for] improvements to the home.”

Bond says the skyrocketing housing prices is another reason to put down 10%. If you were to wait until you save 20%,the type of house you wanted to buy could be much more expensive, and that 20% down would still be more than you were able to save. Even if you have to pay PMI with a 10% down payment, by purchasing a home, you are still investing your money rather than spending it on rent during the period of time it would take to save the additional 10%.

The “ideal”

Lenders see the 20% down payment on a mortgage as the ideal for borrowers. It means you are seen as less of a risk, and therefore, are the best type of lendee. However, as in all things, it comes down to your personal financial goals and well being.

If you are in a position to put down the 20%, that’s terrific. But maybe don’t put more down than you have to.