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The question "how much should you put down on a home?" is a bit rhetorical. It almost assumes that the individual has unlimited means and the luxury of simply choosing how much they wish to put down. For many, this is not the case. Individuals of modest means typically have a small to modest amount available for the down payment on a new home. A more realistic way of thinking about it might be what are some good guidelines when trying to determine how much an individual should put down on a home.
There are a few guidelines when considering how much to put down, including:
At a down payment of 20%, an individual should have available to them the full universe of loan options (assuming good credit), should have access to the lowest interest rates available at that point in time, and will not have to pay private mortgage insurance. If an individual can afford it, they should try to put down at least 20% on the home they wish to purchase.
Strategies for Individuals with Less than 20% to Put Down
Many people do not have the means to put 20% down on a home. For these people there are strategies they can employ to at least avoid paying private mortgage insurance. Many individuals use a combination of their down payment and a second mortgage to add up to a 20% down payment. For example, for a $100,000 home and a $10,000 down payment, the individual would need a $10,000 second mortgage to have a 20% total down payment.
Employing this strategy, the individual will probably have access to the full range of loans and advantageous rates for their first mortgage, and they will avoid paying private mortgage insurance. They will, however, have the interest of a second mortgage at what will typically be a higher rate than the rate on the first mortgage.
Using the example above to determine if this strategy is advantageous, a borrower would need to compare the costs of taking out a single mortgage of 90% loan-to-value (LTV) with 10% down against the cost of a first mortgage with an 80% LTV, a 10% down payment, and a 10% second mortgage. They would compare the monthly interest charge of the 90% loan and the monthly PMI charges against the monthly interest charge of the first and second loan without PMI to determine which is better financially. They should also take into account if there are any additional application, processing, and closing fees in the two loan scenario.
Strategies for Individuals with More than 20% to Put Down
For individuals who have the luxury of being able to put down more than 20%, the question becomes one of tradeoffs. A larger down payment means a smaller mortgage, greater equity in the home, smaller monthly payments, and better cash flow. However, a larger down payment also means less to potentially invest elsewhere for better returns. Individuals who tend to be conservative and cash flow conscious tend to put down more. Individuals who believe that they can invest the money to obtain a better return elsewhere tend to put down less.
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