You’ve most likely heard this rule: “save for a 20% down payment before you buy a home”. The logic behind saving 20% is solid. It shows that you have the financial discipline and stability to save for a long-term goal (like buying a Ventura home). It also helps you get favorable rates from lenders. But there can actually be financial benefits to putting down a smaller down payment—as low as 3%—rather than parting with so much cash up front, even if you have the money available. How do you decide whether the smaller down payment strategy is the right decision for you or not?
Which Down Payment Strategy is Right for You?
The Downside
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance (PMI) for years. The lower your down payment, the more PMI you pay. You will also be offered a lesser loan amount than borrowers who have a 20% down payment. In turn, this eliminates some Ventura County homes from your search.
The Upside
According to Rocket Mortgage, the national average for home appreciation is about 2% per month and roughly 14.5% per year. But the appreciation is independent from your home payment. So whether you put down 20% or 3%, the increase in equity is the same. If you’re looking at your Ventura area home as an investment, putting down a smaller amount can lead to a higher return on investment. This also leaves more of your savings free for home repairs, upgrades, or other investment opportunities.
The Happy Medium
Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20% and an investment-focused, small down payment. Your trusted real estate professional can provide some answers as you explore your financing options.
Dave & Pat Zumbrun, your Ventura County real estate specialists
