Don’t we all want to own a house? Isn’t it such a great feeling to have your very own place to return to after a long day? So, if you are planning to get your own new house, just what amount of money should you put down on it? Most people can only spend around 20% or less of the actual cost as down payment for their house but for those who do have the resources to spend more than that, how much is actually required? You will get answers to all your questions in this post which will talk about just how much money in down payment is enough.
Let us get started with how each type of down payment will affect you. There are basically three options with each one having its own set of merits and demerits. Let us discuss.
Make a larger down payment
- The first option that is presented to us is to make a larger down payment. By larger, we mean paying more than 20% of the house cost as down payment. A 20% down payment is sufficient for a variety of reasons. A 20% down payment means you will not have to use any type of private mortgage insurance in the middle. This is awesome because these insurances can cost you a lot. A 20% down payment will also reduce the risk of higher interest rates later.
- Adding more to your down payment seems like a good option. If you have already settled with 20% of the actual cost and also have some extra money to spare, you might want to invest it in your house. There are both upsides and downsides to this approach.
- If you make a larger down payment, you have to pay smaller installments each month. This takes off a lot of load and lets you be more flexible with your budget. However, is the decrease in the money you pay during installments really worth investing all your extra money? For instance, you have $60,000 extra after taking out 20% for down payment. If you do invest all of it in your down payment, you will significantly reduce the price you pay in monthly installments but what after that? If you had the same amount of money in your savings account, you could have a source of financial safety. In case you end up losing your job in the near future, the fact that you have to pay less money on a monthly basis towards house mortgage will not soothe you as much as having $60,000 in your savings account.
- Also, maintaining and owning a house is costly and if you end up spending all your extra money for down payment, you will not have anything left for repairs, maintenance, replacement, and other things that one needs to get done.
- Depositing all your money as down payment means you will be spending all your capital on just one investment rather than diversifying your money. Putting more money for down payment will not necessarily give you more returns than actually saving it for other purposes.
If you are looking for down payment assistant, there may be help for you either from an outside agency. Many people ask me: where to sell my annuity? You can cash in that annuity to put down the cash you need on your home in order to avoid extra fees to make your payment as low as possible.
Pay points to reduce the cost of loan
- Another option which you can consider is paying points so you can reduce the cost of the loan. A point is 1% of the loan amount and each time you pay a point, you end up decreasing the interest rate by 0.125% in a 30 year mortgage plan. Therefore, if you pay five points on a $300,000 loan at 4.2% interest rate, it will be equal to $15,000. Since for each point you are reducing the interest rate by 0.125%, you will end up decreasing your interest rate by (5 x 0.125)% which is 0.625%. From 4.2% to 3.575% interest rate. This will definitely save you a whole lot of money but in case you decide to sell the house and move somewhere else, your points would go waste.
- As nothing is fixed in life, decreasing your interest rates by paying points is not a highly recommended option. In long term, you do save money but the chances of wasting it is also high.
Make a down payment of 20 per cent and invest the rest somewhere else
- Probably the best thing to do when applying for a home loan is to pay only 20% as down payment. The rest of the extra money should be diversified and used for other purposes to improve your quality of life and increase chances of making more. You will also save more money this way and have extra cash in cases of emergency.
- Some good suggestions for using the money would be to invest in liquid assets such as stocks, mutual funds, exchange traded funds, and similar investments. These would allow you to liquidate parts of your investments in favor of addressing some major events. These could be the requirement of getting major repairs or maintenance done in the house, helping finances in case of job loss, and similar situations which can occur without warning.
- Also, it is not advisable to invest all the extra money into equity investments but some should also be reserved for cash equivalents to address financial emergencies whenever they come. All in all, the best option for anyone would be to save their extra money and invest them in other ways than simply spending it all in the down payment of their home.
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