The Great Down Payment Debate: Money Down or In Your Pocket?

You won’t find me buying a house without a down payment, but it’s a growing trend to do just that. Personally, I’m not a fan of going into anything owing more money that something is worth and/or not having any equity. You can do what makes you most comfortable, but that’s just where I stand. I will never forget when an acquaintance of mine was renting a house with her family. She hated the house she was renting because it was so small. However, it was cheap and she said it gave her and her husband time to put money away for a down payment on a new home.

Fast forward two or three years and they bought a larger home that they fell instantly in love with. So happy for her for spending that time making a small sacrifice for the bigger picture, I congratulated her on her new home. Imagine my shock when she mentioned that she kind of hated that she waited so long to buy their new home when they didn’t even need a down payment. Their realtor told them before they were pre-qualified that they could mortgage almost their entire house without putting down any money if they just paid private mortgage insurance. Sure enough, they decided to pocket their savings and finance their entire house. Now they have a house, but they have no equity. They have money in the bank, but they’re paying for more for their mortgage that I, and my house was significantly more expensive than theirs. How does that even make sense? It doesn’t, and it’s not a financially wise decision.

Now, I understand that there are people in a financial situation that does not allow them to put down money and buying is less expensive than renting (insert any other situation and/or circumstance here). I get it; and I know that not everyone can put money down. However, I do highly recommend it and not just because I’m married to a banker who is so financially opinionated. I know down payments are a roadblock for so many buyers, but there are so many negatives associated with not putting money down.

Private Mortgage Insurance

I’m not even going to pretend I even know how to figure out what you will pay for PMI when you don’t put money down on a home. I’m not; I promise. I’ll be incorrect and end up with an inbox filled with hate mail and name-calling. What I will do, however, is tell you that your PMI depends on the amount of your loan, the value of the home, your credit score and a few other factors. Now, I will also tell you that it might be as little as a few hundred dollars per month added onto the price of your mortgage, or it could be a small mortgage in and of itself; and you have to pay this until you owe less than 80% of your home’s value. Sorry; it’s just the way it is.

Do you really want to pay insurance on your mortgage simply because you’re considered a risky borrower? Banks don’t love financing homes that have zero equity, and they will make you pay significantly for that because it’s their loss if you choose not to pay that mortgage after a time. It’s a lot of money, and often costs buyers tens of thousands of dollars over the first few years of their mortgage.

Higher Interest Rates

When you make the decision to forgo a down payment, you also make the decision to welcome a higher rate. With your credit score, your mortgage, your loan rates and terms and a few other factors, your lender is going to look at the fact that you did not put money down and raise the rate they’re going to give you. Why? Because you officially became a risky buyer. While the rate won’t increase so much that you cannot live with it, it’s still thousands of dollars more over the life of your loan. No one wants to pay more for that reason.

High Closing Costs

Did you know that the cost of closing your mortgage is based on the cost of your mortgage? If your home is more expensive and you are financing more, you will pay more at closing. If you put money down, you lower the cost of your mortgage. This effectively lowers the cost of your closing costs. When you don’t put money down, you pay more at closing. It might not seem like a huge deal since you’re not paying tens of thousands of dollars out of your pocket right here and now to your bank as a down payment, but it’s a few thousand additional dollars added onto the many thousands of extras you’ll pay over time by not putting money down.

Financing your entire home value or using money to put down is up to you. Just know that it’s always a financially sound decision to put money down. It’s less expensive, less risky and it means you’ll pay a much smaller mortgage for a lot longer. You cannot beat a lower monthly payment, can you?

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