Should You Put a 5%, 10%, or 20% Down Payment on a House?

​Give Yourself a Cushion

Let’s think of a scenario – say you put all your savings (or most of it) into your new home. You would have no room for a cushion or buffer if anything would go wrong. If something did go wrong, you would then have to finance again and put yourself in a worse position.

Instead, you could have put just 10 percent down for your home, have a small PMI payment, and still have a bit of a buffer for anything that goes wrong. Plus, it’s important to remember that the PMI will drop off once you hit that threshold of 78% percent of the original value of the home. Having that small amount of PMI might be worth it to you to have that security of not spending all your money.

Waiting Could Cost You More

Okay, maybe you’re thinking, “That’s great and all, but I don’t want to pay PMI, so I’m going to wait until I save up 20 percent.” We hear so many clients say they want to wait or that they don’t have 20 percent yet, but meanwhile, the market starts to get away from them. People that we’ve talked to a year or two ago that thought they wanted to save 20 percent because they had it in their mind, they did not want to pay PMI! Well, they’ve now lost out on 50, 70, or even 100 thousand dollars or more in equity because of home appreciation.

So, would they have been better off buying a home with 5 percent and paying a little bit of PMI to gain 100 thousand or more in equity? Yes, they would have been better off doing that for sure.

A Lower Down Payment Could Save Money for Home Improvements

Another example where paying PMI and doing a lower down payment makes more sense, is if you want or plan to do improvements to the home. You might want to take that extra money and make sure you have the cash to do what you want to do to the home now, versus getting into a home equity line of credit with a higher interest rate or having to finance for those items later.

Paying PMI Can Help Consolidate Debt

It’s no secret that most people have debt outside of a mortgage – they have credit card debt, a car payment, or something else that’s a bigger monthly payment. So, let’s just say you have $20-30k of debt – you could take the additional money you currently have and pay all that debt off versus putting more down on your home.

For some people, this might make more sense because, right now, you can still borrow at historically lower rates than most rates on other debt payments. Having that low rate and financing a little more money with some PMI on an appreciating asset (your home) is usually a better way to spend money versus having debt which is a depreciating asset, or no asset at all. A lot of the time these monthly payments are credit card debt on things you already bought, and you don’t even know what those things are anymore!

So, Should You Wait or Buy Today?

Well, it really is an individual choice, however, we highly recommend having an advocate and advisor. Here at The Oddo Group, we try to be that resource for you so that we can come alongside you, lay out the options, the pros and cons, and help you make an educated decision.

Many times, doing the lower down payment today to get into that home and ride up the appreciation, is a much smarter choice than waiting to save for 20 percent.

Get in touch with us today to learn more about which situation is right for you!

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