How Much Should You Put Down On a Home?

March 20, 2014

You know spring is in the air when people start thinking about home buying. I recently got questions from several people asking about buying  a home. One of the most common is how much to put down. Let’s look at a few things to consider:

1)      How much do you need to put down? Unless you qualify for a VA loan, almost any lender is going to require you to have some skin in the game. That can be as low as 3.5% on an FHA loan but you’re generally required to put down more. You may also need to put more down to make the monthly payments affordable.

2)      Would a larger down payment get you a lower interest rate? If so, it might be worth doing.  After all, that lower mortgage rate is on the full mortgage balance so a .25% reduction on a $300k mortgage for an additional $10k down is a 7.5% return on that extra money.

3)      Can you put down 20%?  If not, you’re likely to have to pay for private mortgage insurance (PMI), which will no longer be tax-deductible starting this year. The good news is that the PMI can be dropped if your equity rises to 20% but with FHA loans, the mortgage insurance premium (MIP) stays with you for the life of the loan.

4)      Will you have enough cash left over for emergencies? One of the biggest mistakes people make is to put all of their savings towards the down payment to buy as much or as soon as they can. However, having emergency savings is actually MORE important once you’re a homeowner. For one thing, you’re now responsible for all the maintenance and repair costs that you used to have the landlord cover. Second, you probably have more fixed expenses to cover, whether you’re employed or not. Defaulting on a  mortgage is a much bigger deal than breaking a lease.

5)      What else can you do with your savings? With the average 30-yr mortgage rate at 4.29%, you may have better options for your savings than to put more than 20% down even if you would still have enough cash leftover for emergencies. Paying off high interest debt like credit cards is an obvious one but you’d also probably earn more by investing the extra cash than you would save in interest by making a larger down payment.

As you can see, there’s no one right answer. It all depends on your situation. You have to find your personal “Goldilocks” number: not too much, not too little, but just right.