When purchasing an investment home, many new investors struggle between deciding if they are going to put more money down an investment property or if they should have more available capital left in their reserves. Understanding the upside and the downside to each option will help new investors make better choices when it comes to acquiring new properties and deciding how much money to put down on their investment property upon purchase.
Reasons You Should Choose to Put Up a Large Down Payment:
Putting up a large down payment on the property they you are purchasing for investment purposes does have its benefits. For one, if you put up a larger down payment, you will likely be able to avoid having to get private mortgage insurance (PMI). Avoiding PMI means that you will be able to save money when you make your monthly mortgage payments as you won’t be paying fees (higher interest rates) for extra PMI insurance because of a low down payment.
The average down payment requires about 20% of the value of the property to be put down at the time the property gets purchased. For example, if you were to purchase a $200,000 property that would require a traditional $40,000 down payment.
Some other benefits you get when you put a larger down payment out for a property includes the following:
- Protects you against home price declines if the value of the home ever was to fall below what you owe the bank through your mortgage you could be at a greater risk of losing your property.
- Eliminates the need for mortgage insurance which can save you money each time you pay the mortgage as you don’t have to ensure the mortgage you have taken out if you put a big enough down payment out up front.
- A larger down payment up front helps keep your monthly mortgage payment lower. For example, if you put 5% down on that $200,000 property instead of a traditional 20%, your loan size will now balloon to $237,500, and the loan payment would rise from $955 with 20% down to $1137 with 5% down. Larger down payments are key to keeping your monthly expenses down throughout the life of the mortgage.
- A 20% down payment will allow you to get the lowest interest rates possible and best mortgage terms available. That means that you pay less money towards the principal on your loan and not more interest to the bank.
- You have a better chance to get approved for the mortgage to purchase your investment property.
- You will have a much easier time paying off the mortgage in a much faster and easier manner.
The recommendation of putting up a 20% down payment when you are purchasing a property is highly recommended to save you from having to make higher payments and pay more in interest in the future.
Large Down Payments Take Away Investable Capital:
Many individuals who wish to invest in real estate might be tempted to put less down on a property than the recommended 20%. However, along with that comes what will generally be a higher monthly mortgage payment and more money that is going to pay off interest rather than the principal loan that you took from the bank.
It’s understandable to want to have extra capital to invest in other resources such as stocks, or cash to keep in the bank in case your investment property needs repairs. However, putting less than the 20% down on a property means that you will be literally “throwing money away” by paying higher interest rates and paying for property investment insurance that you otherwise wouldn’t have to have if you put the 20% down. The lower monthly mortgage payments will also be nice in the long run (15-30 year life of the mortgage).
Putting down a full 20% and also saving for some emergencies might mean you wait a little longer to buy your investment property, but that can be worth it to avoid throwing more money away in the future through increased interest rates and PMI insurance.
In the end, you want to put your 20% down on an investment property to ensure that you can get the best possible terms for a mortgage. Paying less interest and avoiding PMI insurance will likely save you $10,000s over the life of your mortgage loan. Developing a strategy to wisely invest your capital (cash) to help it grow faster can help you reach your dreams of being a property investor more quickly than just leaving cash in a low-rate (less than 1%) checking or savings account.