Because buying a home is a serious investment, you want to make sure that you go about it the right way. You may be thinking about getting into the real estate market but are unsure of how much money you need for a down payment or whether you should take out a loan or save up for your money down. There are advantages and disadvantages to each option and they should be reviewed before making any decisions. Often, people are forced into buying a home. If your family is growing and you need an extra room you may not have much choice but to buy right away. If you do have the luxury of time it can be of benefit to compare the pros and cons of holding off and saving more money for a down payment or borrowing money to buy a home through a different type of loan.
Saving up for a large down payment has its advantages. You will pay less interest (which can amount to thousands of dollars) and you can avoid paying for mortgage insurance. Mortgage insurance is required when your down payment is less than a certain amount. Having a large amount of money to put down will also reduce your risk of not being able to pay back your mortgage if the value of your home drops and you are forced to sell it.
One disadvantage to saving your money for a large down payment is that while you are saving money you are also losing it by paying rent. Unless you are in a unique situation such as living with friends or family for free, your monthly rent payment is being thrown away on something that you do not own. You may also lose out on a house that you have your eye on due to fast increasing housing prices. In many areas, the prices are increasing so rapidly that if you do not buy soon you may not be able to afford it until the prices decrease again.
Buying a house with some other type of loan also has its pros and cons. On one hand you can stop paying rent sooner and start investing in your own home while building equity. You also eliminate the risk of house prices rising to a range that you are unable to afford. Alternatively, you will end up paying more interest with a smaller down payment. Over the course of the mortgage this amount will be significant. If you take on a larger loan than you can handle and are forced to sell the house, keep in mind that there is no down payment to cushion you.
Considering all of your options before investing in a home will ensure you make the right decisions to fit your financial and personal needs. An investment advisor, real estate agent, and financial planner may be good resources to provide further information to help you make an informed decision.
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