You’ve most likely heard the rule “save up for a 20% down payment before you buy a home”. The logic behind saving 20% 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 3%—rather than parting with so much cash upfront for your Havasu home purchase even if you have the money available.
Which Down Payment Strategy is Right for You?
The Downside
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance (PMI) for years. The lower your down payment, the more you pay. You’ll also be offered a lesser loan amount than borrowers who have a 20% down payment, which will eliminate some homes from your search.
The Upside
The national average for home appreciation is about 5%. The appreciation is independent of your home payment. So whether you put down 20% or 3%, 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. According to Realtor.com, prices rose 24.1% between March 2021 and March 2022. But you should not bank on these outrageous gains to continue forever. In fact, Fortune Magazine believes that Lake Havasu City is one of 13 market across the country with a “high likelihood” of experiencing a decline in home prices by March 2023.
The Happy Medium
Of course, your Havasu home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20% and an investment-focused smaller down payment. Your trusted real estate professional can provide some answers as you explore your financing options.
Sunstone Real Estate Group at Coldwell Banker Realty, Lake Havasu City, AZ