The latest episode of the Business Builder Series, hosted by Doug Dean of Shafritz & Dean, featured Matthew Johnson, a Mortgage Loan Officer with Anchor Home Mortgage. With a background in telecom and sales, Johnson specializes in condo financing and is actively involved in the LGBTQ+ Real Estate Alliance. His expertise shed light on common mortgage misconceptions, loan options, and condo financing challenges. Here are the key takeaways from the discussion:
Why a Larger Down Payment for a Home Purchase Isn’t Always the Best Idea
When buying a home, many buyers believe that putting down a large down payment is always the best strategy. After all, a larger down payment can reduce monthly mortgage payments, avoid private mortgage insurance (PMI), and decrease the amount of interest paid over time. However, there are situations where a smaller down payment might actually be the smarter choice.
- Opportunity Cost of Tying Up Cash
One of the key drawbacks of a large down payment is the opportunity cost. The money you use to pay for a larger down payment is no longer available for other investments or emergency needs. If you have other high-interest debts (like credit card balances) or could invest the money elsewhere for a higher return, you might be better off keeping that cash liquid. - Mortgage Insurance Can Be Avoided with Strategic Borrowing
While many people opt for a 20% down payment to avoid paying PMI, it’s not always necessary. There are loan programs available that allow you to put down less, while still avoiding PMI. Plus, some lenders even offer options to eliminate PMI after a few years of mortgage payments or once you’ve built enough equity. - Preserving Liquidity for Future Needs
Buying a home comes with additional expenses beyond just the purchase price. Maintenance, repairs, property taxes, and insurance can quickly add up. By opting for a smaller down payment, you keep more cash on hand to cover these ongoing costs, or even to invest in your home’s future value through renovations. - Lower Down Payments Can Be a Strategy for Homebuyers in a Competitive Market
In a hot real estate market, putting down a larger down payment might not always help you secure the home of your dreams. Sometimes, securing financing with a smaller down payment can allow you to purchase a home quicker, and it might also open the door to other flexible loan programs. Additionally, with current low interest rates, locking in a mortgage with a smaller down payment might still allow you to keep monthly payments affordable while holding on to extra savings.
Conclusion
While it’s tempting to believe that bigger is always better when it comes to a down payment, a larger sum might not always be the most effective strategy. Buyers need to weigh their current financial situation, future goals, and the housing market before making a decision. Sometimes, a smaller down payment could be the more practical choice, offering more flexibility, liquidity, and opportunities down the road.