My friend Jay Vorhees at JVM Lending put together some thoughts on why you should make smaller down payments. I thought this was an interesting idea, so here is his blog reprinted, with my thoughts at the end! Read on:
We recently had a borrower with ample income and about $70,000 of liquid assets try to squeeze into a $600,000 home with 10% down. She wanted us to put as much down as possible to minimize her housing payment. We instead talked her into putting 3.5% down and using FHA financing for the three reasons discussed below.
- Pay off consumer debt: When buyers have a lot of consumer debt, we always encourage them to make smaller down payments and then use the remaining cash to pay off consumer debt. The monthly savings from paying off consumer debt almost always far exceed the potential savings from having a smaller mortgage. In addition, mortgage interest rates tend to be much lower than consumer debt interest rates and most mortgage interest is tax-deductible, while consumer debt is not.
- Save cash for the “unexpected”: Many buyers vastly underestimate the amount of cash they will need for unanticipated expenses once they buy a home, especially if they had been renting. These costs include moving costs, new furniture needs, new appliances, minor home improvements of all types (window treatments, floor coverings, etc.), higher utility bills, and higher yard and home maintenance costs.
- Take advantage of low rates: When rates are this low, it is much more affordable to put less down and to borrow more in any case.
These are good thoughts by Jay. However, a buyer is at a disadvantage if multiple offers are made. It is more likely, in that scenario, that you will lose out to someone with more money down and they may remove some or all of their contingencies. Each situation is unique and all options should be discussed so a buyer understands the pros and cons and can make an informed decision!