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Pros and Cons of a Low Down Payment Mortgage

By Kate Strassel | Citizens Bank Staff

Did you know you’re not required to put down 20% when purchasing a home? If this is news to you, you’re not alone. Many first-time home buyers aren’t aware that you can purchase a home with a lower down payment.

You may have heard the magic number for a down payment is 20%. But if you don’t have that much saved, you don’t need to give up on your dream of buying a home. You may qualify for a mortgage with a lower down payment option. But there are some pros and cons to consider.

Ready to buy a home? Before you head to the bank, learn the pros and cons of a low down payment mortgage to determine if putting down less than 20% makes sense for you and your unique situation.

The pros

You could become a homeowner sooner: A lower down payment could mean you’re able to buy a house months — or even years — sooner than if you waited to save up the 20%.

You’ll keep more cash in your pocket: If you spend less on the mortgage down payment, you’ll free up funds for other home expenses, such as making improvements or upgrades, buying furniture, decorating, and landscaping. Or, you could put that extra money toward an emergency fund.

You may qualify for a first-time home buyer program: Many lenders offer lower down payment options for people purchasing their first home. For example, some loans allow qualified applicants to put down as little as 3% of the purchase price. And if you’re a veteran or an active duty service member, you could qualify for 0% down. It’s worth the effort to research the options to find the program that best suits your needs and goals.

The cons

Your monthly payments will be higher: It’s a simple matter of math — the smaller the down payment, the larger the amount left over to divide into monthly payments. Will you be able to afford that amount along with your other financial obligations and goals?

You’ll pay more in interest — and probably a higher rate: The size of your loan will directly impact the amount of interest you pay. Putting down less up front means paying more interest over the life of the mortgage.

It’s also likely that you’ll end up paying a higher interest rate with a lower down payment than if you put down 20%. That’s because lenders assume more risk with a low down payment.

Your lender may require private mortgage insurance (PMI): Private mortgage insurance (PMI) offers the lender some protection against loss in the event you default on the loan. The cost of PMI is typically anywhere from 0.2% to 1.75% of the total loan amount. The cost of the premium may be included in your monthly mortgage payment, or you may be able to pay the premium up front as part of your closing costs.

You could end up with low or negative equity: The more you owe on your home, the less available equity you have in the home. If house prices drop and the value of your home dips below the outstanding amount you owe on your mortgage, you could end up with negative equity — which may hurt your chances of qualifying for a home equity loan or HELOC in the future.

What to remember

Your current financial situation and future goals will play a big part in determining whether a low down payment mortgage is right for you. A mortgage calculator can be a useful tool to see how different down payment amounts will affect your total monthly payment. Once you know the facts, you can get back to the fun part — finding your first home!

More information

Getting ready to purchase your first home? A Citizens Bank loan officer can help you find the right product to reach your goals. To learn more, visit us online or search for a loan officer in your area.

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