When Do You Use 3% Down Payment?


When would you not put 20% down to buy a home?

We’ve all been taught that the best way to purchase a home is a 30-year mortgage with 20 percent down payment. After all, less than 20 percent down and you will be paying Private Mortgage Insurance forever, you will be borrowing more, and probably at a higher interest rate.

While all that is true, how common is it for buyers to put down 20 percent? According to the National Association of Realtor, not that often. The last time someone looked, in 2016, the average down payment was 11 percent.

Back in the day, most home were purchased with cash. Over time, prices went up and people could not pay cash. Mortgages were born and developed into a 20 percent down plan. Several years ago, the US government decided that all Americans should have a home which produced Fannie Mae and Freddie Mac.

Their programs were very competitive with a loan-to-value (LTV) as high as 97% or 3 percent down. Which is where we are today, somewhere between 3.5 and 20 percent, depending on where you go for mortgage.

When would you finance 97%?

There are four valid reasons, number one is that it costs a lot more money upfront. Assuming a $350,000 home, that is a difference between $10,500 and $70,000 down payment. A good chunk of money.

Which leads me to reason number two, you might wind up house poor with 20 percent down. In the previous example you would have used an additional $55,000 of cash. That money might have to be used for repairs or maintenance of the house.

That dovetails into reason three, that $55,000 is now tied up in a very illiquid asset. Gaining access in time of need could prove to be difficult. Remember the adage, "Banks will loan money when you don’t need it and not when you do!".

Finally, your lifestyle may just not support it! Some homebuyers flat out decide that it is more important to have a child in a particular school district or live in a certain neighborhood. Some decisions are made knowing that it will cost more monthly with the trade off of the risk of moving each year because of increasing rents, or the landlords selling the house.

How to decide?

Each situation is unique, you should sit down with a competent financial advisor and explain your needs, assets and expenses.

The advisor will be able to show you several different options and work with you to a satisfactory conclusion. Someone I would suggest is Adam Parks. Adam is an independent fiduciary and financial planner. He can be reached at Trinity Wealth Management, 847-917-9954

If you have questions about mortgages or financing, please feel free to call us. After thirty years in the business, we have contacts!