There are many reasons why you might save and wait to buy when you can afford a larger down payment yet there are also many reasons why you may wish to take out a mortgage with a lower down payment so you can start building equity in your home quickly. We at Blink advise you keep reading so you can learn more about the pros and cons of both options! Learn more about the math behind your mortgage here!
The minimum down payment for a principal residence is 5% whereas the minimum down payment for a rental property is 20%.
If you choose to save more and wait to put down 20% or more, you will pay much less interest in the long run and will not have to buy private mortgage insurance (PMI) due to the sheer size of your down payment. Despite the savings on interest, there is still a very good chance that by not taking out a mortgage you will still need to pay rent until you have saved enough to purchase a home.
Because a down payment is likely the largest investment you have, putting a large down payment on a property can be extremely risky. If the price of the home you have a loan on drops drastically, the money you have put down could be considered a failed investment.
Let’s assume your home has increased in value over one year from $500,000 to $550,000.
With a 20% down payment ($100,000) your rate of return is 50%
With a 5% down payment ($25,000) your rate of return is 200%
Now let’s assume that the difference in interest rates plus the additional PMI costs add an additional 1%, meaning that they are paying an additional $5,000 per year.
This still means that the rate of return for the borrower is 180%, far above the 50% rate of return with a larger down payment.
Want to learn more about the mortgage process and how digital mortgage brokers are the future of the industry? Check out more blogs here and learn more!