Let us say find yourself in a somewhat unusual position, ample funds to use as a down payment on a home. Maybe you have inherited money, received a cash gift from a family member, or perhaps you have been squirreling away money for years. So here is your dilemma: just how much money should you put down on the home? There are many schools of thought about down payments. Some loan programs allow borrowers to put down a minimum down payment, as little as 5% of the purchase price. Traditional mortgage programs required borrowers to put down a minimum of 20%. And of course, you can always opt to put down a greater percentage or even buy the home outright.
So how do you weigh your decision about how much money to put down? You can accomplish different things based on the amount you put down on your loan. Making the Minimum Down Payment When you put down the minimum amount on your home, you keep a large cushion of cash available for any unexpected purchases or emergencies, or simply have funds available to purchase all new furniture or accessories. On the down side, you also have less equity in the home initially. If you have to sell the house unexpectedly, you may pay out-of-pocket expenses if the home has not appreciated above 10% of the original purchase price. Putting Down a Huge Amount If you have significant cash assets, you may consider putting all of that money down on your original loan. It means that your monthly payment will be much lower than if you had put down a smaller percentage.
It also means that you will have less interest to deduct each year on your income taxes. Many people are concerned with becoming house poor and a large down payment gives your more flexibility in your income. There are some other options. You could use the extra cash to boost your buying power. You could make up the difference between the home you would normally qualify for based on your income/debt ratio and a slightly more expensive home that will appreciate at a higher rate. Another option to consider is using some of the funds for investment property in addition to the down payment for the property that is your primary residence.
With investment property you can rent out the property for the mortgage amount, and still accrue wealth through the growing equity. Splitting the Difference Many home owners decide to go for the option that gives them the most flexibility. Put down a healthy amount, such as 20% and retain the remainder for emergency savings. You will build equity in the home faster, you will not have a huge mortgage payment, and you will still have a good interest deduction at year end. Purchasing a home is the first step in building wealth. Think about your down payment as a vital part of your investment in your future, and use it wisely.
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