Do you have enough cash to make a large deposit? If so, you can avoid many unnecessary homeownership costs.
Many years ago my husband and I bought our first house with just a 10% down payment. The decision to do this worked out well. But in retrospect, I didn’t realize the risk I was taking.
Now that I’m older (and hopefully a little wiser) it’s a mistake I wouldn’t make again.
In fact, I’ll never buy a home less than 20% less again. And there’s a big reason for that.
There is a great risk of buying a home with a small down payment
There are many disadvantages to buying a home with a low price deposit. But for me the main reason I think it’s a bad idea is one thing: you could easily end up underwater in your house, which means you owe more than it’s worth.
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After buying and selling several homes in my life, I learned that there are huge transaction costs associated with selling a home. If you hire a real estate agentYou have to pay around 6% commission to sell your home. And even if you don’t, you are almost certainly paying 3% to a buyer’s broker since the person buying your home will likely be represented by a real estate professional.
There are also Closing costs to pay, which can add up to thousands of dollars. And if your home needs repairs to attract a buyer, these can be expensive too.
Because of all of these costs, you could very easily not be able to sell your home for enough to pay your money back Mortgage lender and cover all additional costs associated with the sale. And that means that if you don’t have extra cash to pay off your loan balance and cover everything else, you may be trapped in your home.
Unfortunately, when you’ve made a small down payment, you need property values to rise significantly. Or you would have to be at your home for a long time and repay a good part of your loan balance – um Not You are in a situation where it is difficult to sell your home for enough to cover it all.
Conversely, if you cut 20%, you have a lot of cushion to absorb the selling cost. This can be helpful if you need to sell before you have had time to pay big for your loan, or if your home becomes valuable enough to meet your expenses. You would also be better positioned if your home ended up going Low in value.
Of course, the risk of not being able to sell for enough money is just one of several reasons why paying a small down payment on your home can be a problem. You will owe it too private mortgage insurance if you bet less than 20%. This is a type of insurance that protects the lender in the event of a foreclosure so they won’t lose money if your down payment is small – but you have to pay for it even though it doesn’t protect you.
For me, the biggest concern is the risk of a small down payment that results in you owing more than your home is worth. That’s because I don’t want to be trapped in a situation where I can’t sell unless I have thousands of dollars in extra money. And that risk is worth considering before getting a home loan without investing a lot of money.
However, if a low deposit is best for you, the good news is that you have plenty of options, including:
For more information on the pros and cons of taking a small deposit, check out our guide how to buy a home without a down payment.