Growing up, I always heard that you should expect to put down 20% of the purchase price when you are ready to buy a home.
A down payment is the upfront cost you pay out-of-pocket rather than borrowing. This amount helps to build your equity, lower your monthly payment, and provide lenders a level of security.
It’s possible to put down less than 20%, though most lenders would issue an additional fee to your monthly payment called Private Mortgage Insurance (PMI). PMI is designed to protect the lender if you default on your loan.
A 20% down payment is indicative of your risk-factor and a great gauge of your ability to afford the home.
So…why did Brian and I only put down 10% instead of 20%?
A Strategic Decision
Truthfully, Brian and I did not have a hard budget in terms of shopping for a home. The guideline we used was a simple “Let’s not buy more than we want to afford.”
Once our offer was accepted, we strategically decided against a 20% down payment.
We had the funds.
We had enough on hand to cover the 20%, but it did not make sense for us to offer.
If you can help it, you should never wipe out your emergency fund unless you are truly facing an emergency. Brian and I had some extra cash we could have thrown into the offer. However, we certainly did not want to touch our emergency fund.
Rather than completing requested repairs before purchase, the sellers compensated the cost during closing. Brian and I ended up not having closing costs. Although this was great for us, it also meant that we would have to eventually pay for the repairs!
Additionally, we had to furnish our house! It’s bigger than our last home, so we had a few empty rooms. Though we moved in 2 months ago, we are taking our time with buying furniture. Furnishing a home can cost a pretty penny, so we are being mindful about when and what we want to purchase.
Previous home sale
Over the next couple of months, Brian and I will be getting our last house ready for the market. We are firm in our decision to sell our home. Once the house sells, we will roll a portion of the funds into our new home. This amount will cover the other 10% and eradicate the PMI!
Ultimately, we didn’t want to stretch ourselves too thin. Because we plan to sell the house and move some extra money into the new house, we are okay with paying PMI for a few months.
There is no one-size-fits-all rule when it comes to down payments or finances, in general. In fact, while talking with friends, we’ve found that most did not put down 20% on their home purchases. It appears that many home buyers are foregoing the old standard of 20% for a more reachable 3-7% down payment.
To determine your down payment sweet spot, take a look at your immediate expenses and gauge it against your future expenses. A larger down payment reduces your monthly mortgage payment. Would you have extra funds on hand in case life happens? A down payment of less than 20% may lock you in with an additional PMI monthly fee. Would you be comfortable with paying an added fee?
Brian and I offered a 10% down payment because we factored these points and more into our decision-making. I’m happy to report that, for us, this ended up being the right decision! If we had drained more of our savings, we would have been stressed and stretched way too thin in a very empty house. Luckily, we had extra money to take care of some repairs and start furnishing our new home!
Smart to keep in mind, especially with rising interest rates. Always a good idea to hold onto some $$ just in case.