In theory, home equity is like a bank account, it grows over time as your property value increases, and you continue to make your monthly mortgage payment. After the roller coaster that the market has gone through over the past few years, it finally seems to be stabilizing, and slowly property values are back on the incline. Keeping this theory in mind, many home buyers are under the assumption that placing the largest down payment they can afford will yield them the lowest possible monthly payment, and put them in position to have the most equity. While both of the before mentioned statements are true, my opinion is that we have backed ourselves into a purchase market where less is more.
By making a smaller down payment (using an FHA loan), and placing 3.5% down on a new home, you accomplish 3 things. First, you are often able to purchase a much more desirable home than you would be able to get if you needed 20% down. Second, you retain much more of your liquid assets that you have worked so hard to accrue. Third, and often most importantly, you have money left over to make any home improvements necessary to make this your perfect home.
While using an FHA loan will have a slightly higher payment than a conventional loan with 20% down, keep in mind that you can always refinance at any time in the future. As long as property values continue to increase and you effectively upgrade your home with the additional funds that you planned on using for the down payment, you can often beat the market. The final product is a home exactly how you had always pictured it, now with 10-20% equity, and you only put 3.5% down. Moreover, you can now refinance your FHA loan into a conventional loan, while never having made a large enough down payment that is mandatory for conventional financing.
If you have questions about any new or current home loan please give me a call.