Many first-time homebuyers wait to buy because they think they need at least a 20% down payment, but this isn’t necessarily true. The truth is, you may be eligible to buy a home with a down payment as low as 3%. It can be a great deal, and a huge burden off your shoulders.
Here’s the question though: “Is this deal right for you?”
Let’s look at the upsides and the downsides of a low down payment so that you can decide for yourself.
1. You become a homeowner faster
The less money you need to save for a down payment, the sooner you can call a home your own. Buying a house faster can also be smart if interest rates are rising or if home values are going up in your community. Simply put, you’re buying before prices get so high that they prevent you from finding a house you love and can afford.
2. You keep more cash in hand
You don’t want all your savings tied up in your house to the point that you can’t spend it on things like repairs or emergencies. Simply put, a lower down payment leaves more money in your wallet for the immediate future.
3. There’s help for first-time homebuyers
Many people don’t realize that there are programs to help first-time homebuyers. FHA loans make home buying more accessible to more people (and allow 3% down payments). If you’re a veteran or an active duty service member, a VA loan is another loan option that can help (and allows you to put 0% down, if eligible).
There are public and private programs across the country that help, too – and you’d be surprised how impactful they can be. A down payment assistance program might be available in your community, so doing a little research on one of these programs could really pay off.
Sounds pretty good so far right? Well, before you make up your mind, let’s take a look at those downsides.
1. It takes longer to build home equity
Home equity is basically the current value of your house minus what you owe on the mortgage. The smaller your down payment, the less equity you start with – which means the longer it takes to do something like a cash-out refinance.
2. You’ll need private mortgage insurance
Most lenders require you to pay for private mortgage insurance (PMI) when you make a down payment of less than 20%. This is an extra expense you’ll have to pay every month on top of your mortgage payment, at least until you reach the 20% threshold. Since you’re putting down a small amount up front, PMI essentially safeguards the lender in case you default on the loan.
3. It’s risky if home prices fall
If the market value of your house goes down, you can end up owing more than the house is worth. Say the price of your house falls to $210,000 and you owe $230,000 on the loan, you have $20,000 worth of what’s called “negative equity,” also known as being underwater.”
So that’s the low down on low down payments. Want to know more about loan choices when you’ve got less cash? See our post on 5 Mortgages That Don't Require 20% Down.
Ditech is not a financial advisor and the ideas outlined above are for informational purposes only. They are not intended as investment or financial advice and should not be construed as such. Consult a financial advisor before making decisions regarding important personal financial matters, and consult a tax advisor regarding the deductibility of interest and tax implications.