Shopping for a house in the beautiful Shoals region of Alabama? You have picked a wonderful area to live, whether you are staying for just a few years or you have decided to put down some roots.
There are quite a few decisions you will need to make about your mortgage for your new home, one of which concerns your down payment. Depending on your finances, you may find yourself with the choice to make a large or small down payment. Which makes more sense, and why?
Why You Might Consider Making a Small Down Payment
There is a tendency for homebuyers (especially first-time homebuyers) to automatically think that a small down payment is better. A lot of lenders and brokers cater right to this, emphasizing in their advertisements that they offer loans with low down payments.
There are indeed plenty of scenarios where a small mortgage down payment in the Tri-Cities is logical. For example:
- When you literally cannot afford to make a large down payment. Maybe you are just getting your financial start in life. You have a great job and you can afford to make monthly payments on a home, but you do not have a huge chunk of cash in the bank to drop on a down payment.
- When you need to keep your finances flexible. If you take all of your savings and put them into a down payment on a house, that money is no longer liquid. What if an emergency comes up, or there is a change in your regular bills? You could find yourself struggling to get by.
- When you want to have money free to invest in other assets. It is often wise to get an early start on investments when possible. That way they have more time to grow.
- When the housing market is unstable. If you are purchasing a home at a time when market values are rising and falling a lot (or simply falling), you may want to hold off before you invest a lot in the equity of your home. You may decide to sell, and you want to keep losses to a minimum.
- When you only plan to stay in the home for a short time period. Just going to be living in the Shoals for a few years before moving on? Choosing a loan with a low-down payment keeps your finances flexible and simplifies your life now and closer to when you decide to move again.
If a low-down payment is important to you, we recommend looking into USDA, FHA and VA loans. While there are requirements you need to meet to qualify for these loan programs, you may be surprised by what you could be eligible for.
During your consultation, we can help you figure out whether you could qualify for a loan with a low-down payment or even zero down payment through any of these government-insured loan programs.
Why You Might Choose to Make a Large Down Payment Instead
In some situations, your credit score and other financial metrics might mean that you are eligible for a small down payment, but capable of putting down a larger one. For example, you might qualify for a down payment of just 3.5% but be able to afford 10%.
When should you think about putting down that larger amount voluntarily? Here are some possible scenarios:
- When you want to keep monthly payments down. As mentioned above, putting down a lower initial payment on the home can mean that you will be paying more each month. If you want to keep your monthly payment amount smaller and more manageable, a higher down payment may help you do that.
- When you want to pay off the mortgage sooner. If you plan to pay off the mortgage in full and stay in the home long-term, it is in your interest to do so as quickly as possible so long as you are not causing yourself other financial inconveniences. Doing so will reduce the total cost of the mortgage since you will pay less interest.
- When you want to apply for a jumbo loan. A higher down payment may help you qualify to purchase a pricier home.
- When you want to get out of the PMI requirement. Higher monthly mortgage payments are not the only ongoing cost of a small down payment. Another may be the requirement to buy private mortgage insurance, or PMI. You can get around this by putting down more upfront.When you want more negotiating power. A buyer who is willing to pay off a significant portion of the mortgage upfront is more likely to be taken seriously than one who is not willing or able to make an immediate large investment in a home. This may give you more power to buy a house, and to negotiate the terms of the mortgage. It could mean you will pay a lower interest rate, which could save you money.
A low-down payment may be enticing, but for those looking to invest long-term in a property, a higher down payment is often the wiser financial choice if you can afford it.
Whatever Your Down Payment Needs, We Can Help
Whether you are prepared to pay a large mortgage down payment in the Tri-Cities or a small one, American Pacific Mortgage, Inc. Inc. can help you apply for a competitive home loan. To get started, please call (205) 495-0313, and we will schedule you for your consultation.
