You’ve most likely heard the rule: Save for a 20-percent down
payment before you buy a home. The logic behind saving 20
percent is solid, as it shows that you have the financial discipline
and stability to save for a long-term goal. It also helps you get favorable rates from lenders.

But there can actually be financial benefits to putting down a small
down payment—as low as three percent—rather than parting with
so much cash up front, even if you have the money available.

THE DOWNSIDE

The downsides of a small down payment are pretty well known.
You’ll have to pay Private Mortgage Insurance for years, and the
lower your down payment, the more you’ll pay. You’ll also be
offered a lesser loan amount than borrowers who have a 20-percent
down payment, which will eliminate some homes from your search.

THE UPSIDE

The national average for home appreciation is about five percent.
The appreciation is independent from your home payment, so
whether you put down 20 percent or three percent, the increase in
equity is the same. If you’re looking at your home as an investment,
putting down a smaller amount can lead to a higher return on
investment, while also leaving more of your savings free for home
repairs, upgrades, or other investment opportunities.

THE HAPPY MEDIUM

Of course, your home payment options aren’t binary. Most
borrowers can find some common ground between the security of a
traditional 20 percent and an investment-focused, small down
payment. Your trusted real estate professional can provide some
answers as you explore your financing options.