Are Big Or Small Down Payments Better?
The real question is whether it’s better to put money into a home or elsewhere. Without knowing the rate of return for “elsewhere” and the level of risk and tax consequences when compared with putting money into your own home, any answer is speculation.
As a practical matter, most first-time buyers have little choice — they cannot buy for cash or even with a large down payment. Those with property who are moving to a new home often have a different situation because they have equity built up over many years. For such individuals, how much down — a lot or a little — is an option.
If property values are rising, then a small down payment can make great sense because you’re using other people’s money (OPM) to acquire and hold real estate, maybe a larger and more expensive home than you could afford with a large down payment or an all-cash transaction.
If property values are falling, then perhaps no amount down is appropriate. In such situations it may be better to rent.
In addition to economics — where can you get the best rate of return considering risk, leverage, taxes, etc. — there are also matters of personal preference. Some people simply want a house that’s free and clear of all debt, or as little debt as possible.
If you have a choice, ask some questions: What would make you happiest? What does your tax professional say? And then go with it.
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