Becoming a home owner is many people’s dream, and at one point in their life, it will probably become reality. But there are several factors that need to be considered when buying a home, most of them related to how much you will be spending on your loan. Finding a home is the easy part, and you probably won’t encounter too many issues there. But making sure that you are not overpaying is a little harder, and will require some research.
Of course, your financial situation may require you to make some compromises, such as having lower monthly payments at the cost of paying more overall on your mortgage loan. Another aspect of your loan in which you can compromise is the size of your down payment. For years, the majority of lenders have required borrowers to make a 20 percent down payment, but it looks like 10 percent down payments are back, and they are an attractive alternative to many home buyers.
Advantages of Making a 10% Down Payment
Depending on how much the home that you are buying is worth, a regular 20 percent down payment can mean a large amount of money, which many home buyers are not able to afford. For some, it might take years to come up with the 20 percent down payment, so the 10 percent alternative is a good option. Besides the down payment, home buyers shouldn’t forget about other costs associated with taking out a mortgage loan, such as closing costs and insurance. Closing costs can be very high, making the 10 percent down payment even more attractive, compared with the hefty 20 percent down payment.
Another advantage of not having to save for a long time in order to come up with the 10 percent down payment is that, when saving money for a few years, there is always a chance that home prices may rise, making it impossible for you to buy a home with the amount of money that you have saved up. You should also take inflation into account- 20 percent of the cost of the home right now will, most likely, not represent 20 percent of the price of a home a few years from now.
Even if you can afford the 20 percent down payment, you can choose to only put down 10 percent and use the other 10 to finance repairs or improvements to your new home. That extra 10 percent can also be used for investing in stocks or mutual funds, but this is only recommended for those who have experience in these types of home investments.
Disadvantages of Making a 10% Down Payment
One large disadvantage to making a 10 percent down payment is that qualifying for a lower down payment is fairly difficult. Lenders require your debt to be less than 45 percent of your income, and your credit score to be above 700. Many of these restrictions apply to 20 percent down payments, as well, so qualifying for a 10 percent down payment won’t be too difficult if your only problem was coming up with the 20 percent required by all lenders until now.
Another disadvantage is that, if home prices go down in the future, you could end up with a home that is worth less than what is owed on the mortgage. If this happens, you may not be able to sell your home, which may lead to other serious issues. 10 percent down payments can also be problematic if you have little equity in your home and decide to sell. Your loan value plus selling costs can be higher than the sale price, resulting in you losing money.
10 percent down payments are back, and that is good news for home buyers with good financial situations, but who can’t or choose not to make a 20 percent down payment. But before deciding how much of a down payment to make on your home, you should calculate how much money you would save or lose with each option. If the down payment size is the only thing standing between you and home ownership, then go for it, but you shouldn’t choose to make a 10 percent down payment just because you can, without weighing in on both the advantages and disadvantages.