DOWN PAYMENTS ON HOME PURCHASES ARE CLIMBING, BUT IS THIS TREND WORTH THE COST WHEN BUYING A HOME?
Recent reports suggest that home buyers are putting more up-front money than ever before into the purchase of a home.
According to the team at ATTOM Data Solutions, the median down payment for single-family home purchases reached $19,900 or 7.6% of the median sales price. These numbers mark the high point since data tracking began 18 years ago. It’s also worth noting that this represents an impressive 19% increase from the first quarter.
Daren Blomquist, senior VP for ATTOM, remarked that “buyers are upping the ante when it comes to down payments, evidenced by the record-high median down payment for homes purchased in the quarter.”
For many potential home buyers, this raises the question of whether a higher down payment is a good idea. Or should the initial outlay of funds be something more modest? There are definite benefits and drawbacks to each scenario.
ADVANTAGES OF A LARGE DOWN PAYMENT
Minimum down payment programs have opened the door for many home buyers who were previously unable to do so. However, if it's feasible to make a down payment of 10% or more of the home’s sale price, there are significant financial benefits.
Reduced Borrowing: Simply put, the higher the down payment, the less money a buyer needs to borrow. This translates to more favorable loan terms from the lender and less interest paid over the life of the loan.
Lower Monthly Payments: If the goal is to ensure a more manageable monthly note, a higher down payment will help with that burden. Lower monthly payments also mean greater financial freedom with other finances.
Mortgage Insurance: More accurately, a lack thereof. Higher down payments reflect less of a risk for lenders, which means a borrower would not be required to pay this additional monthly cost.
DISADVANTAGES TO MORE UP-FRONT MONEY
Sure, there is flexibility with putting more money down on a home purchase, but a substantial initial investment is not always advantageous. If other financial goals share space with a home purchase, a small down payment makes sense.
Keeping Cash in Reserve: Even if plenty of funds exist, after paying a 15% or 20% down payment, that money is gone. In many instances, it’s more prudent to maintain a healthy savings. This will ensure reserves are available for renovations or in the event of unforeseen circumstances.
Fast Track to Home Ownership: As previously noted, there are plenty of programs that offer a lower threshold for home ownership. Saving toward a 20% down payment is no small feat. If timing is a factor, a lower percentage is more beneficial.
Less Money for Investing: For many individuals, investments other than real estate are a contributing factor to their overall economic health. Big down payments can significantly reduce the resources available for other fiscal pursuits.
RISK AND REWARD
A home purchase, more than any other investment, requires an individual to take full stock of their finances. If the numbers don’t make sense for a large up-front commitment, then other options should be explored.
However, plenty of rewards exist for those willing to put forth the cash, so it comes as no surprise that more home buyers are putting up larger amounts. If a purchaser finds they are in a position to fully reap those benefits, the high down payment trend is one worth joining.