Why a Low Down Payment Mortgage Can Be the Best Financial Decision for Decades
When it comes to getting a mortgage and buying a house, it seems as if everyone has an opinion. Some people think fixed-rate mortgages are better than adjustable-rate mortgages, and some people discourage a cash-out refinance while others feel it’s an excellent way to take advantage of their home's equity. Similarly, you might come across people who think buying a home with a low down payment is a terrible move. They might go as far as saying, “If you can’t afford a large down payment, then you can’t afford to buy a house.”
Although putting a large amount of money down on a home purchase has its benefits, this doesn’t mean that you should ignore mortgage options that keep your out-of-pocket costs in check. In fact, the decision to limit the costs you incur when buying a home could have a positive impact on your finances in the long run. Here are three reasons why a low down payment mortgage can be a smart financial decision.
1. You won’t drain your savings account
Saving for a down payment as a first-time homebuyer has its challenges. Even if you earn enough income to manage a mortgage payment, it can take years to build up your savings account. And once you have a large cash reserve, you might be reluctant to drain your savings—or most of your savings—on a home purchase.
Low down payment mortgages let you retain cash in the bank. You might still be responsible for your own closing costs, but without the burden of a large down payment, you’re able to maintain funds in your personal account for an emergency or a home repair. If you were to drain your savings on a home purchase, it could take years to replenish your nest egg. And if an emergency occurs before you rebuild your savings account, you might have to rely on credit cards to handle these expenses.
2. You can buy now, and lock in today's known rates and home prices
When you don’t have enough stashed away for a large down payment, a low down mortgage can open the door to homeownership.
There’s no way to predict whether prices and interest rates will increase or decrease over the course of years. However, if you delay a home purchase until you’ve saved enough for a large down payment, you risk paying more for a property if values begin – or continue – to rise in your market. Additionally, rates have been at near historic lows for a long time, so there’s a real chance that they’ll increase by the time you’ve saved up a 20% down payment. Both of these factors can increase your housing expense. The more you pay out-of-pocket each month for housing, the less disposable income you have available to build an emergency fund and save for retirement.
3. You can build a higher net worth at a younger age
The sooner you purchase a home, the sooner you can leaverage the housing market to get a jumpstart on building wealth. It is true that a low down mortgage might result in a slightly higher interest rate and monthly payment, and you might have to pay mortgage insurance, which is required on most loans with less than 20% down. But on the upside, you’re able to own a property.
Owning your own home eliminates spending money on rent month after month, which does nothing to build your wealth since you don't own your residence. And as your home value (hopefully) increases in your market and your mortgage principal decreases, you earn equity. You can then sell the property and put the profit toward the down payment on your next home, which might be bigger and provide the space your family needs. Depending on how much you put down on a future property, you might be able to keep your monthly payment roughly the same.
Some could argue that buying with a low down payment is costlier because you’re financing a larger amount and you might have to pay monthly mortgage insurance. But as a first-time homebuyer, low down programs can get your foot in the door, allowing you to purchase sooner rather than later. If you're a first-time homebuyer, give us a call to explore Cherry Creek Mortgage's low or no down payment mortgage solutions.