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Ask Money

How big a down payment

Chris Farrell Nov 8, 2011

Question: I am in my late 20s and have no debt. I have been working two jobs for a few years, one of which includes my housing. This has allowed me to save quite a bit for a down payment on a condo, which I plan to buy in the next 2-5 years. It may be possible for me to put 30-50% down when I’m ready to buy. Is it ever a good idea to put more than 20% down? I realize that a mortgage is relatively cheap money, but I’m also concerned with borrowing a large amount of money. I’m not sure how long I would be living there. Myles, Cedar Rapids, IA

Answer: It’s smart to put 20% to 25% down on a home. You’ll enjoy a nice equity cushion, you’ll get the best interest rate, you won’t pay private mortgage insurance, and it’s a strong sign that your finances are healthy enough to absorb the costs of homeownership. Clearly, your finances will be just fine.

So, why not out down 30% to 50%? I think a d different set of calculations come into play at that point.

For one thing, I don’t think it’s wise in today’s volatile job market to tie up all your savings in a home. It’s better to keep a large emergency fund. It won’t be hard for you to do even after putting a 20% to 25% down payment on the condo.

For another, other investment opportunities may come your way or you may decide tio embrace a life-style change. A healthy pot of savings allows you to take advantage of the options in front of you.

Another big question is how long will you stay there? You say you’re not sure. Well, once you know you’re in the home for the long-haul it could make sense to accelerate mortgage payments to limit your interest outlay. Then again, while you’re uncertain I think there are better uses of the money.

Here’s the thing: You really can’t go wrong if you put down a larger down payment. But for me the key is to have as strong a household balance sheet as possible, which is why I favor keeping a fair portion of your savings outside home equity.

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