One of my favorite things to do as a loan officer is creatively tweak a file to help my client personalize a mortgage so that it best suits their needs for the next 5-7 years of their life.

Important questions we encourage clients to consider: 

1. Is your new home a starter home (3-4 years) or forever home?

2. Do you believe rates will drop soon? We can provide context on this one!

3. What are other plans or goals you have for your family? Do you need to start / fund a college savings account? Emergency fund?

These and other questions are the starting point for deciding what down payments and setup is right for a client. Not to mention, there are 3 fun and unique perks to choosing a lower down payment we will discuss below:

1. You get better rates if you choose a lower down payment. Usually.

For example, if you have a 740 credit score, for a $400,000 loan, it is $1,000 more expensive to choose a 20% down payment, versus a 3% down payment, for the same interest rate. The adjustment is .875% versus .625% (this is a percentage of the loan amount you'd need to pay at closing to get the same rate as someone doing a 25%+ down payment with a 780+ credit score.

In most cases, on a $400,000 loan amount, you'll save between $1000 - $2000 at closing by choosing a 3% down payment versus a 20% down. Yes, you would then have a monthly PMI payment.

2. Your future net worth will likely be higher if you choose a lower down payment, and INVEST the difference, for example, in the stock market.

I love doing a side by side comparison for clients so they can see how the numbers come to life. Let's say you are debating between a 20% down, or a 5% down payment. On the same $400,000 purchase scenario we were discussing above. 

Yes, if you do a larger down payment, you'll have more equity in 5 years! Approximately $185,472 to be exact. Thanks appreciation!! Your $80,000 down payment ballooned into $185,472 thanks to 4% annual appreciation, and paying down your mortgage every month. This is of course an estimate for home appreciation and not a promise of future returns! 

However, if you do only a 5% down payment, and invest the $60,000, your investment account would balloon up to $81,583 assuming a 6% annual rate of return.

Your total net worth would be $25,111 greater if you'd choose a LOWER down payment and invest the difference.

3. Last question I ask clients: Have you made sure your emergency savings account and retirement savings is on track before choosing a larger down payment?

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This is why we often cover the questions listed above with clients, to help them consider where their money is best serving them. 

For the scenario above, the monthly PMI for a 5% down payment would be ~$79/month assuming a 780+ credit score borrower, and a 25% DTI ratio. Would you consider it worth keeping $60,000 in your savings account in exchange for a $79/month PMI payment? 

Again, down payment % is a different answer for every family, but certainly worth considering all the options available.

Questions on this? Don't hesitate to text me at 414-488-0438