When buying a home, some financial experts recommend making the
largest down payment possible, while other experts suggest --
are low -- financing as much of your purchase as possible.
"It's important to ask the right questions about how various
down payment amounts will affect your mortgage insurance and
mortgage payments," says Keith Gumbinger, vice president of
HSH.com. "You need to figure out if it's worth begging your parents
for a certain amount of cash."
"Your first question should be how long you intend to live in
the house, because if you plan to leave in a few years it may not
make sense to put in a lot of extra cash," says Scott Davis, a
senior loan officer with McLean Mortgage in Fairfax, Va. "The next
important question should be what it takes for you to make a larger
down payment. If you have to wipe out all your savings to get to a
10 percent down payment, then you shouldn't do it."
It's especially critical for homeowners to have a robust
emergency fund in place to deal with
home maintenance and repairs
, says Joseph Montanaro, a financial planner with USAA Enterprise
Affairs in San Antonio.
"A smaller down payment could allow you to maintain an emergency
fund, pay down high-interest debt, or utilize the funds for other
goals," says Montanaro. "However, making a smaller down payment
should not be an approach to buy a home you can't afford."
The impact of your down payment
Several factors in your loan payment are influenced by the size
of your down payment.
You can use a
to estimate the impact of your down payment on your loan balance
"Putting an extra 1 or 2 percent [down] will reduce your monthly
payment a little, but usually it makes more sense to make a down
payment of 10 percent and keep that cash in the bank for
emergencies," says Davis.
Private mortgage insurance (PMI) is required on all conventional
loans with down payments less than 20 percent. FHA-insured loans
require mortgage insurance, regardless of the down payment.
Montanaro says putting down less than 20 percent is fine as long as
you're buying a home you can afford.
Typically, PMI requirements adjust according to your down
payment in 5 percent increments, says Davis.
A 5 percent down payment requires PMI equal to 30 percent of
your loan amount. A 10 percent down payment requires 25 percent
coverage and 15 percent down requires 12 percent coverage, says
For example, a $350,000 purchase with 5 percent down could have
a PMI payment of $261. A 10 percent down payment will bring down
the PMI to $162. PMI payments depend on your down payment, your
credit score and your debt-to-income ratio.
"Shifting from 8 to 10 percent down won't change your PMI, but
it will impact your loan balance and your monthly payments," says
You should calculate the difference in PMI payments over time,
since PMI is required until your loan-to-value reaches 78 percent,
"Adding $2,000 or $3,000 to your down payment may only change
your monthly payment by $25 or so, but that adds up to several
thousand dollars over time," says Gumbinger.
If you opt for a 10 percent down payment ($35,000) on a $350,000
purchase instead of a 5 percent down payment ($17,500), that
significant cash outlay will lower your principal and interest
payments by $172 per month.
You can use a mortgage calculator to estimate your monthly
payments at various loan amounts and
current mortgage rates
"Your interest rate will be a little better with a higher down
payment in increments of 5 percent because your loan-to-value
changes," says Davis. "The difference in the mortgage rate varies,
sometimes it's as little as one-eighth of a percent and sometimes
it's one-fourth of one percent."
"The size of your down payment depends on how much of your
savings you'll be depleting," says Gumbinger. "If you're pulling
money from an investment you need to look at the tax implications
and the loss of your investment opportunity in comparison to the