Thursday, May 26, 2016

The Pros & Cons of Small Downpayments



     It can be hard sometimes to save a large chunk of money at once, say, for a downpayment on a home.  You already have rent, car insurance, health insurance, a car payment, utility bills and everyone needs the internet.  Those are just basics!  If you stick to a nice budget it could be easy enough to save a decent size downpayment in a couple of years on top of everything else, not including emergency spending!  But say you had a chance to get into your own home after just a couple of months of saving?  You could avoid years of spending rent money that would be lining someone else’s pocket.  

     Here are some of the Pros and Cons when considering making a low down payment purchase.

Con:  Putting less down typically means higher interest rates and monthly fees.  Often times terms of the contract on lower down payment loans requires purchasing mortgage insurance, but not in all cases.  There is a financial incentive to putting more money down up front.  However, getting into a home now can be worth it over trying to save on top of renting.

Pro:  Instead of saving for a house on top of paying rent, a lower downpayment loan will at least get you in a house you can start paying on now.  It may cost you more in interest, but it could be worth it when it’s going into your own property, in some cases, the extra interest costs can be made up for in less than a year.

Con:  Making a smaller downpayment on a home doesn’t mean you can afford a bigger one.  This is a misconception people make when budgeting.  Remember the cost of running a larger home is well, more!  You can’t hold a landlord responsible for replacing large appliances and you can’t bail to cheaper housing if your income suffers in any way.

Pro: Most people throughout their career receive periodic raises, so just because you’re not at your earning goal yet, doesn’t mean you won’t be.  Being able to make bigger payments down the road can make up for the higher interest cost up front.


     Ultimately, building equity in your home is a safe investment.  You’re protected from rent spikes and you can write off all of your mortgage interest premiums on your tax return every year.  Not to mention, owning your own home can be great! 

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