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Friday, December 30, 2011

Why 20% Downpayments Don't Always Make Sense (or Dollars)

the “doom and gloom” in today’s headlines, in the current economic climate, homeownership is more affordable than ever, thanks to low interest rates and lower home values. For those buyers who manage to have a 20% (or more) downpayment, they believe this will get them the lowest monthly mortgage payment. However, simply because buyers can afford to put down this amount does not necessarily mean they should.

Those buyers who have saved enough to put 20%—or more—down on the purchase of a home may want to consider another approach—preserving some of their cash for savings, investing or other purposes. It may sound counterintuitive, but with today’s interest rates and the competitive pricing of private mortgage insurance (MI), borrowers can retain some of their money by putting less money down on a home—say only 10%—and still get a low monthly payment.

Real estate professionals and loan officers have a responsibility to all home buyers to help them evaluate their purchasing power based on existing assets as well as future need. The right counsel can help home buyers leverage their current assets while keeping sufficient reserve for any immediate or future financial needs, not to mention all the trips to the local big box hardware store that seem to come standard for any new homeowner.

While in the past the adage was, “The more you borrow, the more you leverage,” in today’s financial times, the scenario is much different. Today, borrowers can leverage private MI to put as little as 3.5% down on a home and still have a competitive payment. And for those potential buyers who have stayed out of the market over worries of declining property values, they can still purchase a home without funneling all of their available cash into the downpayment. By utilizing this strategy, home buyers are able to leverage their current assets, while still keeping sufficient cash reserve.

So, while putting 20% down on a home doesn’t always make sense (or dollars), buying at a time of high affordability does.
clear skies,
Doug Reynolds

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