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5% Down Vs. 10% Down - A Comparison
You may pay more upfront with a 5% loan, but it gets you in a house sooner...One issue facing new home buyers is this: How much should be saved for the down payment. Many people, on advice from various experts, wait to save up 10% of a home's value, rather than moving into the home sooner with a 5% down payment. There are times when it is better to get that home with the lower down payment amount.Let's see why: We have 2 young couples, the Argyles and the Bakers. They both have the same amount of money to spend on housing and saving ($1000/month). From that $1000, they are both paying a rent of $750/month, and saving the other $250 for their down payment. In fact, they are almost identical families. The Argyles and the Bakers are both looking to buy a $100,000 property. As such, they will need $5000 as a down payment, if they purchase at 5% down. And $10,000, if they wish to have 10% as a down payment. To date, they have both saved $5000 with which to purchase a property. The Argyles have decided to buy now and accept that they only have 5% as a down payment. The Bakers have decided to wait until they can raise the 10%; thus saving themselves some mortgage insurance costs. (In Canada, this mortgage t insurance is known as CHMC). They may also save be getting a lower mortgage rate. And they will save on a lower overall interest charge because their starting principle will be smaller. What the Bakers aren't realizing is that while they wait, the cost of the property is increasing... thus increasing the amount of money they need as a down payment or they will need to downgrade their expectations and buy a smaller home. They've also not taken into account that the money they are paying in rent is being thrown away, while they could have been putting that against their mortgage. Sure, saving the Mortgage fees is a tempting idea and you always want to start out with a lower principle to pay back. But it is not necessarily the right way to go. If it takes the Bakers an extra 20 months to save up the extra money, the property could have increased by as much as $15,000 in that time... meaning that they'd need more of a down payment, as well as having a larger mortgage than if they'd bought earlier! So waiting the extra 20 months to raise the additional $5000 may well be offset, by the equity you could be building in your new home and the risk that the home you want will be priced out of your range. On the other hand, sometimes the housing market is stable and prices remain constant over a fairly long period of time. And sometimes the cost of housing actually goes down. But there are usually more up times than down times. Pay attention to where the cycle is today and weigh the pros and cons of buying a house now. Using money on paying rent that could be going towards the cost of a house is often the tipping factor in buying today, even with the extra cost that may come with 5% down payment. Deciding which option to go for is something to talk to with your bank and your mortgage advisor. In the meantime, keep setting aside money every month for your down payment and keep an eye out for the house of your dreams. About the Author: Scott Harker is the publisher of several websites including: Sherlock Holmes Pastiches, Con Collector's Dream, Harvest The Sun, Dieting Help | Move More - Eat Less, and Free Apple Recipes.
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