You’ve most likely heard the rule: Save for a 20-percent down payment before you buy
a home. The logic behind saving 20 percent is solid, as it shows that you have the financial
discipline and stability to save for a long-term goal. It also helps you get favorable rates
from lenders.

But there can actually be financial benefits to putting down a small down payment
—as low as three percent—rather than parting with so much cash up front, even if
you have the money available.

THE DOWNSIDE

The downsides of a small down payment are pretty well known. You’ll have to pay
Private Mortgage Insurance for years, and the lower your down payment, the more
you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a
20-percent down payment, which will eliminate some homes from your search.

THE UPSIDE

The national average for home appreciation is about five percent. The appreciation
is independent from your home payment, so whether you put down 20 percent or
three percent, the increase in equity is the same. If you’re looking at your home as
an investment, putting down a smaller amount can lead to a higher return on
investment,while also leaving more of your savings free for home repairs, upgrades,
or other investment opportunities.

THE HAPPY MEDIUM

Of course, your home payment options aren’t binary. Most borrowers can find some common
ground between the security of a traditional 20 percent and an investment-focused, small
down payment. Your trusted real estate professional can provide some answers as you explore
your financing options.