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Chrisman's Corner: Should Down Payments Be a Lot or a Little?

JMAC’s brokers are often asked by buyers, “How much should my down payment be?” There are two sides to the question, with the buyer usually wanting as little as possible and the lender wanting as much as possible. Generally the two meet in the middle, and with good reasons.

Our brokers know that many buyers are limited as to how much down payment they need for a transaction due to the limit on how much money they have. Other buyers have more flexibility with down payment from the minimum required for the mortgage program for which they are applying to putting 30% or more into the purchase. The more money that is put into the down payment, the lower the mortgage rate. An aversion to debt, to monthly payments, to paying interest is not uncommon-especially following the mortgage and housing market collapses several years ago.

But JMAC’s brokers also know that “cash is king” and getting cash out of a bank account, or many different types of investment accounts, is a lot easier and cheaper than converting home equity into cash at a later date. To access equity from a home the owner either needs to obtain a second mortgage or HELOC that has transaction fees and a either a higher fixed rate or an adjustable rate, fund a cash out refinance of the primary mortgage which has transaction fees and possibly a higher rate than what a rate would be in today's market or sell the home.

There are plenty of other questions that our brokers ask their clients. Does the borrower have a definite need for a large sum of cash in the near or medium future? Children attending college? Planned major remodeling project on the new home after moving in? Opportunity to buy into ownership or partnership at one’s business? With the new housing payment and expenses what will be the buyer’s ability to put aside money for savings, investments, retirement? Will this ability be severely impacted by a higher mortgage payment and retaining a large sum of money in those accounts you currently have? How long does the borrower intend to be in the property?

It is important broker’s clients to consider all of the "what-ifs" and do the math on those what-if propositions. Maximizing one’s down payment may be the best option for the borrower and their family, but it may not be depending on goals and objectives in the future.