How Much Down Payment To Make On A House?

By on January 24, 2018

Real estate success gurus will inevitably recommend paying as little down payment as possible so as to maximize leverage and returns.

They would even suggest going zero-down if possible.

Whereas you mother with a conservative approach would likely suggest that you make as big a down payment as you financially can so as to save on interest rates and alleviate your future financial burden.

There really isn’t a correct or wrong answer here.

What you should do really depends on the situation you are in.

Generally speaking, if you put down a large down payment, it would be easier for a lender to grant you a loan.

They limit their risks and would appreciate your move.

You pay a lower monthly installment and also avoid paying for private mortgage insurance. And if the house depreciates in value, you have a lesser risk of going into negative equity or have the bank call you up in the middle of the night asking you for top ups.

But using all your cash for a down payment also has it’s pitfalls.

Where are you going to find the cash to carry on your lifestyle?

Even if you are not the type who lives a luxurious lifestyle, there could be times where you are in need of emergency cash.

During those times, you will have a hard time to get the bank to release your home equity. Even if they do agree, it could take a long period of time for everything to go through.

On maximum leverage, if you borrow to the hilt and go up to 100% financing, you are going into risky territory.

Not only will you be paying through your ears on your mortgage, you might not even be reducing the principle if you are on an interest-only loan.

In effect, you will never really own the property and will be living on cash flow.

During bad times, cash flow is the first thing that will affect you.

Maximum leverage is a dangerous game to play unless you have an experienced investor to guide you by the hand.

There is really no correct answer to how much down payment you should pay.

Before you try to conjure up with an answer yourself, ask yourself these few questions:

  • Are you currently in good financial standing?
  • What are you long term and short term financial plans?
  • What are your personal plans in the near future?
  • How much money do you have in your emergency fund?
  • Do you have a good credit record?
  • Do you already have problems managing your credit facilities?
  • Are you more inclined towards maximum savings or maximum leverage?
  • Are there alternative investments that is more suited for you?

People who are risk takers usually have no problem deciding to go with maximum leverage.

Those who are more risk-adverse tend to put more money upfront.

A large down payment can make you feel better on the loan as a whole.

But what if you lose your personal income for one reason or another?

Where is the needed cash going to come from?

Minding your mortgage is about planning how to use the financial tools tied to your home to life a better life.

Living your life just to pay off the house can lead to a very stressful lifestyle.

Don’t neglect your personal financial planning when deciding on the amount to pay on your down payment.

A loan for a house is more than just a debt and should not be treated like one.

Affordability

One big factor that affects how much down payment to put on a house is how much you can afford.

And it’s amazing how many home buyers allow lenders to decide their affordability for them.

When we talk about someone’s affordability to take up a mortgage, it is often assumed that we are talking at the lender’s perspective on whether they think you can afford it.

But if you think about it, shouldn’t you instead be the one who should be working out whether you are able to afford it.

The reason why this power and decision making is left to lenders is because too many people take up loans they cannot afford and eventually defaults.

This causes a big headache for a number of parties involved.

Let’s just throw the thought of defaulting out of the window.

I’m sure most of us are prudent enough not to eat more than we can chew.

In this case, affordability of the financing you will take up will be determined by you.

Anyway, even if a bank decides that someone can afford a loan, there is still a big chance that person will default.

The fact that there are so many foreclosure going on is testament to that.

So how do you work out whether you can afford a loan?

You have to first answer the following questions:

  • What are your financial goals towards wealth building?
  • What are your gross monthly household expenses?
  • How do you expect to repay a mortgage? Savings? Windfalls? Investments?
  • What is the projected time frame you expect to own this particular house?
  • Do you have good or bad credit?
  • How much loan to value do you qualify for?
  • Is real estate part of your plan for wealth building?
  • Does a mortgage play a part in your financial plans?
  • What type of financing will be the easiest to attain your requested loan size?
  • Would a jumbo down payment provide significant savings?
  • Have you decided on a fixed rate mortgage or an adjustable rate mortgage?

When you visit a loan officer or a broker, you can expect that they want you to take up as big a loan as possible.

They are incentivized to behave that way.

They will then give you information on the different types of loans available to you.

Each of these product packages will have varying insurance premiums, interest rates, prepayment penalties, qualifying ratios, credit criteria, closing costs, etc.

By answering the questions listed above, you should be able to have a clear understanding of what you want and what type of structure in a mortgage should be suitable for you.

You might even find out that now is not the best time to purchase a house and get locked down with a home loan.

Remember not to leave it to the lender to decide your affordability.

They are not responsible for managing your personal finances, you are. And your family’s well-being can be deeply affected by your decisions.



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