Should You Make a Smaller Down Payment?

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. It shows that you have the financial discipline and stability to save for a long-term goal, and helps you get favorable rates from lenders.

But there can be financial benefits to putting down a smaller down payment—one 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 might have to pay private mortgage insurance, which is a type of insurance that is typically required for buyers with a conventional loan and less than 20-percent down payment. The lower your down payment, the more you’ll pay. You could 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 currently a little less than 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. As always, it’s best to work with a team of trusted experts that can provide some answers as you explore your financing options.

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Are You Ready to Refinance?

As mortgage rates dip lower and lower, you might be wondering if it’s time to think about refinancing. Many homeowners could find themselves able to negotiate a lower rate, and be able to pay off their home loans sooner than they initially planned. If you’re thinking about refinancing your mortgage, here are a few things to consider before you do: 

Know how much your home is worth.

The amount of equity you have on your home is one of the most important factors in refinancing. Your loan to value ratio, or LTV, is what lenders use to calculate how much equity you have. The less equity you hold, the higher your rate will end up being. A real estate agent can compare your home to similar homes in the area and create a competitive market analysis, so you can have a better idea of how your home is currently valued. 

Have clear financial goals.

There are a few reasons that homeowners decide to refinance. You could lower your monthly payment and give yourself extra room in your budget for other expenses. Another option is to continue making the same payment, but pay off your loan a few years earlier than expected. Some homeowners opt for a cash-out refinance, where you borrow more than the balance due and take the difference as a lump sum of cash. This money can then be used to pay off other debts, such as credit cards or student loans, or used to finance remodeling or other expensive home improvements. There is no right or wrong option — it’s best to work with a financial planner or lending expert to decide what will work for you. 

Don’t wait too long.

The mortgage interest rate market is as fickle as the stock market, and interest rates can change quickly. If you feel comfortable with the way the math is adding up, work with a loan officer (and a closing attorney!) that you trust. Get the necessary paperwork — such as current mortgage statements, pay stubs and bank statements — in order so you’ll know you’re fully prepared. Once you and your loan officer find the best rate for you, be sure to request a written confirmation of the rate you’re being offered. Remember, if it’s not in writing, it’s not legally binding! 

Refinancing your home mortgage can seem like an overwhelming and impossible task, but it doesn’t have to be! We’re here to help connect you with the best agents and loan officers in town, and make all of the necessary paperwork and negotiations are completed properly. Contact us today!