If you’re a traditionalist, you probably will not agree with this post. I say that because I’ve touched on today’s topic before, and the comments I received were mostly in disagreement. That’s okay because I was thrilled just to have comments. It meant someone was reading my posts!
Today’s discussion is all about the idea of putting less money down on the purchase of a new home even when you have more available. Here are a few reasons to consider doing so:
To make sure you have emergency reserves
What’s a reserve? It’s an amount equal to one mortgage payment. Ideally, every homeowner should have 12 months’ worth of reserves sitting in a liquid account. I suggest a savings or a money market account. It will earn a small amount of interest and it won’t be co-mingled with the everyday money flow that occurs in a checking account. These funds can be used for when the unexpected occurs … e.g. replacing a furnace.
To outperform your mortgage interest rate
This idea is slightly controversial. Instead of putting 20 percent or more down at closing, why not put as little as 5 or 10 percent down and use the rest to supplement your investments? Those investments can be stocks, bonds, or even real estate. If you buy a home and your interest rate is 4.25 percent, can you outgain that with your return on investments? Traditionalists certainly will disagree with this one as it does come with some risk. That said, however, buying real estate also comes with risk. I agree that real estate is more insulated than equities, but every investment has some degree of risk coupled with it.
To make your home more your home
I sometimes reflect on the time I purchased my first home. I was 24 and so focused on the down payment that I got my mortgage payment to be exactly where I wanted it to be. The problem was that I didn’t even think about things like a washer and dryer. Oops. I had no way of washing my clothes, so I had to end up buying appliances and financing them. I could have put a smaller amount down and had my payment increase by maybe $20 to $30 a month in exchange for liquid funds.
This is probably the biggest bullet point to consider. Most of us have great ideas of how to make a home great. It could include improvements to landscaping, paint colors, knocking out a wall, adding a patio or buying tasteful furniture. Make your home more livable and enjoyable for you because the financial impact may not be as drastic as you think. Every $1000 financed is equal to about $6 per month for your mortgage payment. If you withheld $10,000 of your targeted down payment monies to make your new home awesome, would it be worth the $60 per month payment increase? Maybe.
Some buyers can afford their desired down payment at closing and still have plenty left over for the things I mentioned above. However, most don’t. It’s interesting to consider the mathematics behind each scenario, however. With mortgage rates so low, the cost of financing allows buyers to be flexible in the use of available funds.
I say this almost every week, but that’s because it’s so true. Our team at Fountain Mortgage truly specializes and enjoys helping people walk through different loan scenarios. Our company mission statement is “To educate and empower our clients to make the best financial decisions for their families.” And we deliver on our mission every day. It only takes a phone call to come up with 3 to 5 options for your specific situation and goals. It’s always free and no pressure. So when you’re ready, let’s talk.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268