Many home buyers don’t have the typical twenty percent down payment needed for a conventional home mortgage. If you’re looking at $250,000 homes, twenty percent is $50,000 in cash. Many banks will approve mortgages for far less in down payment— for a price and if you qualify. There may be plenty of reasons that buying is the right choice for your family, even if your down payment falls well below the twenty percent mark. If you’re able to make mortgage payments without feeling stretched and you can still accumulate future savings, it’s an option well worth consideration. Let’s examine the pros and cons.

Pros

Quality lifestyle. Home ownership is an opportunity that many view as a quality of life choice. For parents, owning a home might mean the school district you want for your kids without paying rent. While renting certainly makes sense for some, you’re basically paying someone else’s mortgage. Owning a home definitely comes with more financial and maintenance responsibilities, but it offers you a chance to have more privacy, design your own space both indoors and out, as well as be an owner in the community where you prefer to establish roots.

More money left for closing costs. A down payment is just one of the cash amounts you need to buy a home. Some lenders also require you to have a certain amount of cash reserves available and then of course there are closing costs associated with finalizing your purchase transaction. For example, say you’ve purchased a $200,000 home and put down a ten percent payment of $20,000. With additional cash reserves and closing costs added, you may actually need $31,000 to close the deal. So you might find that putting down less is needed to cover all the costs associated with the transaction.

You have the opportunity to build equity. It will likely take longer to build equity in your home while paying the extra cost for using a low down payment, but your PMI cost (discussed later) won’t last forever. Once you reach a seventy-eight percent loan to value ratio, your bank must cancel PMI. And if your home experiences a surge in home value due to market rates or a major remodel, you might be able to get rid of your PMI earlier.

More money to invest. This “pro” only qualifies if you actually have the additional cash on hand and make the conscious decision to use that cash for other investment types rather than as a down payment for your home. Let’s go back to the $250,000 house example. People who have a knack for crunching numbers might believe there are better options for the $50,000 in cash typically used for a down payment on such a home. They’d rather use a smaller percent down payment and put the rest in index funds or other types of financial investments, attempting to come out ahead over a long-term period. Granted, this is considered a risky route as there are no guarantees on annual returns, but for some, it’s a personal financial preference.

Cons

Higher interest rates. Mortgage lenders factor in the type of loan you’ve chosen (fixed vs. adjustable), the size of your loan, your credit score, the size of your down payment, among others to determine your interest rate. The higher your credit score, the lower your interest rate. The lower your down payment, the higher your interest rate. Typically an interest rate is around 0.25 percent higher on a minimum down payment loan than on a twenty percent one.

PMI. As stated in the beginning, putting down less than twenty percent on a home comes with a price, coming in the form of Private Mortgage Insurance. The bank charges for this insurance since putting down less money is considered a higher risk to them. If you should default on your mortgage, this insurance is for the bank, not you. The amount of your PMI depends on a number of factors. Generally speaking, for a $200,000 loan, you’ll pay around $2,000 extra per year for PMI on top of your monthly mortgage payments. For financially stable households, this could be a small price to pay for getting to live in a house. For others, it’s an extra monthly burden.

Higher closing costs. A lower down payment usually results in higher closing costs. This happens because the lower down payment means a higher mortgage amount and closing costs are often calculated on the size of the mortgage.

Use Good Old Common Sense

There are many lender products available as well as FHA and USDA loans that people can use to buy a home for as low as 3.5 to 5 percent down. But be realistic about your finances. Learn all of your costs associated with such loans before even looking for a house to live in. You want to be able to enjoy a home without worrying about whether you can pay your mortgage or other bills. Home buying is still a choice that needs to be made in a financially stable household. There are too many financially devastating consequences for people who buy and then can’t maintain the payments of all their expenses.

Platinum Service Realty