Choosing the right down payment when purchasing a home is a big decision. Additionally, down payment strategy can impact your overall net worth and financial future for years to come.
Down Payment Options
Unless you pay cash, the mortgage you use to finance your home requires a minimum down payment. For example:
- FHA mortgages require 3.5% down payment
- VA mortgages require 0% down payment
- Conventional requires as low as 3% down payment
Deciding whether to put the minimum down payment or more down on a home purchase is very important. In fact, the decision relates to several factors that differ from person to person.
How do Different Down Payments Impact a Home-buyer?
First, toggling your down payment up or down impacts your monthly mortgage payment. However, payment is just one of many other areas that feel a ripple effect resulting from your down payment decision.
Increasing or decreasing your home purchase down payment changes a wide variety of significant factors. Factors that will impact your finances now and into the future. For example, different down payment levels may cause changes in your:
Each of the above should be considered when deciding what down payment is best for you. Both the short term and long term financial plans need to integrate with your final decision on what down payment you make when purchasing a home.
No one size fits all plan exists regarding down payment.
Interest Rate & Down Payment
In general, a relationship between down payment amount and the interest rate you get on your new home loan exists. While not always the case, a smaller down payment typically results in a higher interest rate.
However, there are scenarios where the inverse is true. Ultimately, this dynamic depends upon your qualification along with the loan program(s) you consider.
Mortgage Insurance & Down Payment
While each loan type addresses mortgage insurance differently, one thing is true – lower down payments result in higher mortgage insurance costs. Mortgage insurance depends on more than just down payment. For example, in some cases the higher your credit score the lower your mortgage insurance.
However, mortgage insurance can be part of an overall financial strategy. In other words, it may benefit you to put less money down and pay mortgage insurance while keeping your saved money invested elsewhere.
Other Investments & Down Payment
Each $1.00 over the minimum down payment requirement that a buyer puts down on a new home may equal $1.00 pulled from an investment (ex: 401k account). Similarly, that same extra $1.0 could represent $1.00 that could have been invested elsewhere.
In either case, looking at the big picture is key. Integrating your home purchase, down payment and overall financial plan helps make sure you choose the down payment best suited for your goals.