The question is:
How much cash should a buyer use as a down payment and how much of a
loan should they apply for?
Well, there is no straight answer to that question. There are several
factors that affect the down payment, such as the type of loan you're
applying for, your income, your available cash-on-hand, to name a few.
It also depends on your long term goals for the home you are buying.
Here are a few things to think about:
- 20% Down - Breathe! The benefits to putting 20% down are fairly
straightforward. First, by putting 20% down, you borrow less which
means you repay less. Second, you will not have to pay private
mortgage insurance (PMI) on the loan, effectively saving you $40 to
$70 a month.
- Less than 20% Down - This is a more common option for first time
buyers. Many loan programs offer buyers the ability to purchase a
home with as little or no money down. This allows you to conserve
your cash for other expenses. The flip-side to putting less than 20%
down is that lenders will require you to pay private mortgage
insurance (PMI). PMI is a monthly fee that the borrower pays if the
loan exceeds 80 percent of the purchase price. Since a lower down
payment results in a statistically higher risk to the lender, PMI
insures a portion of the loan to reduce the risk to the lender.
There are ways to put less than 20% down and still not have to pay
PMI. You'll want to check with your lender for these options to see
if one is right for you.
- The Monthly Payment "Comfort Level" - This is probably the most
important issue that will dictate how much cash you put down. If you
have good credit and a solid income, most lenders will qualify you
for a loan amount larger than you would ever want. Before speaking
with a lender, take a good look at your personal finances and
spending habits. Be sure to include all of your expenses, from the
utilities to dinner and a movie. Then decide just how much you are
willing to pay for a home each month.
- Taxes. It's important to understand the benefits of mortgage
interest and the real estate tax deduction. Since you will own the
home, you will be able to deduct all the interest and taxes you pay
on the home. Consult a tax expert on these issues, but it's
important to get an idea of how much of a tax break you will receive
if you own the home. This will also help you decide your mortgage
amount.
- Opportunity costs. Ask yourself this question: What am I giving
up by putting 20% down? If the purchase price of your home is
$200,000, are you going to miss $40,000? What is that money
currently doing? Is it earning a good rate of return? Will you have
to sell securities and pay capital gains taxes to liquidate that
money? Be sure to investigate the true costs associated with a large
down payment.
- Other debts. Don't forget to consider any other debt you may
have. For example, if you are carrying substantial credit card debt,
it would probably be better to pay the cards off instead of putting
down a large down payment. Or perhaps you only owe $10,000 on your
automobile. It would be better to pay off the car, and put the
difference towards the down payment, thereby eliminating another
expense.
Ultimately, the decision on what amount to put down will be up to
you. Consider this a step in the right direction. There may be other
factors to consider, so think carefully. When in doubt, talk to
friends or relatives that have purchased homes. They may be able to
provide you with additional insight.
|
