Is a 20% down payment necessary in Seattle? You might be surprised

March 20, 2018

When envisioning buying their first home, a lot of first time buyers I work with around Seattle often have the preconceived notion that they have to save up 20% of the purchase price for a down payment. A 20% down payment in Seattle can have its advantages, but it is far from necessary.

 

Are you curious about the option of putting less money down? Would it make you feel better to know that the typical financed home buyer went with a 10% down payment (according to the 2017 National Association of REALTORS® Profile of Home Buyers and Sellers)?

 

When working with buyers, the first questions I ask about financing and purchase price revolve around what a comfortable monthly payment is and the available funds they are considering putting towards a down payment.

 

More often than not, there is no strict rule on the amount of down payment and it can vary from property to property based on the price of property and the amount of leftover funds a buyer may need for any updates or repairs they'll want funds available for (though minimum lender debt to income ratio requirements can affect how much a buyer would be required to put down in order to meet the loan guidelines).

 

Beyond that, there are some general concepts I recommend buyers consider.  One of the biggest factors is liquidity... once you fork over the down payment funds, then the only way to get those back is to sell the home or convince a bank to give them to you in the form of a new loan via a "cash out refinance" or "home equity line of credit (HELOC)"

 

Another major factor is the currently and historically low interest rates associated with home mortgages.  An obvious benefit to a higher down payment is a lower monthly payment, but it's worth considering what the trade-off is. I ask it this way:

 

"if the additional/higher loan amount will only cost you 4.5%, then do you think you can get a better rate of return with those funds invested elsewhere than the 4.5% it is costing you?" Personally speaking, I expect my investment portfolio to yield a higher average annual rate of return than the 4.5% loan cost of keeping my funds more liquid.

 

Another significant factor that I personally pay a lot of attention to, is the fact that a house appreciates regardless of your equity position.  As in, additional down payment funds aren't earning you a better rate of return because the house appreciates regardless of what you owe. Moreover, a higher down payment can actually lower your rate of return on the investment.

 

But what about the cost of mortgage insurance? True, anything less than 20% is going to come with mortgage insurance, which will vary by the loan amount and how far from 20% you slide.  Again, I recommend considering mortgage insurance as a proposition of "am I willing to pay a little extra each month to keep a higher sense of liquidity?"

 

Beyond considering the above concepts, I personally like to bust out some spreadsheets when I'm working through my own decisions of should we (wife and I) buy a particular property, and if we were to buy that property, what financing scenario we like best.

 

I'd be happy to talk through these concepts on an individualized basis with you over coffee (or a suitable alternative)... just contact me and we can find a time to do so.

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