You’ve found the house of your dreams and you are ready to make an offer. It’s in the ideal location, and the property and yard are absolutely perfect. The only problem is that you don’t have an ample amount of cash on hand, so you may need to borrow some – or all – of the down payment, as well as the mortgage itself.
But is that really a good idea?
While you don’t want to let your dream home slip away, the reality is that you could actually end up facing some even worse consequences if you bite off more than you can chew in terms of borrowing.
On the other hand, there could also be some good reasons to consider borrowing your down payment money – provided that you are able to make the monthly payments – and especially if you are able to pay off the second loan sooner rather than later.
Here are some reasons to consider moving forward:
Capture a Lower Mortgage Rate
One situation where borrowing the down payment may make sense is if doing so can get you a lower rate on your first mortgage. For example, having a 20% down payment will typically get you a lower interest rate on your mortgage than having only a 10% down payment – and a lower interest rate on a 30-year mortgage can essentially end up saving you thousands of dollars in interest over the life of the loan.
Borrowing your down payment can also help you to avoid paying the added expense of PMI, or Private Mortgage Insurance. Home buyers who have less than a 20% down payment on their mortgage will usually be required to pay an additional expense for PMI. This insurance protects the lender in case of borrower default. By having a 20% down payment – even if it comes from borrowed funds – you can avoid the added PMI expense.
Maintain Your Emergency Fund
You may also want to consider borrowing your down payment if using your own funds will deplete the entire amount in your savings and / or emergency fund. It is never wise to be without at least some liquid reserves for unexpected expenses that can – and do – come up.
The Bottom Line
Only you truly know your financial situation and what you are comfortable with paying – so it will be important that you not get yourself into a scenario that you aren’t able to continue with over time after you’ve purchased a home.
On the other hand, if you have budgeted in the expense of the additional loan and it will work for your circumstances, then moving forward with borrowing your down payment funds could certainly work.
Are you in the process of searching for your dream home? We would be happy to help. We can also provide you with a free, no obligation analysis of your current home – so Contact Us.