How large should my down payment be?
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UPDATED: Dec 6, 2011
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A long-standing rule of thumb is that borrowers should put 20 percent of a property’s value down on the purchase of real estate. This is a long-standing rule because this amount of down payment has proven to secure a property’s value and allow equity growth. However, just because it’s a rule of thumb doesn’t mean that all can (or should) abide by it. Sometimes prospective homebuyers can only afford 5 or 10 percent, whereas others can afford 50 percent, but may opt to keep some for personal savings.
The fact is mortgage loans’ monthly payments are reduced if borrowers choose to put more down. If reducing your monthly payment to a more affordable level is something you desire, consider making more of a down payment when taking a home loan out.
If you have plenty to put down, and are simply trying to determine how much of that available cash to use as a down payment on your home loan, take a look at the rate of return that extra cash will yield compared to the mortgage rate you’ll receive.
In a very simplistic example, imagine you qualify for a home mortgage loan with a 5 percent interest rate and you’ve already decided to put 20 percent down. If you have a cash on hand worth an additional 20 percent, and that cash is just sitting in a bank account yielding 1 to 2 percent each year, then it would prudent to put it towards the mortgage’s down payment also.
But if that cash is in a stock portfolio generating 10 percent return, then keep it out of the home loan and continue investing it elsewhere.
Ultimately, you want to put your money where it will serve you best.
Meeting with a real estate broker or financial adviser would be the best course of action, as they will help you factor things such as property mortgage insurance (PMI), points, and fees into the equation as well.