Financial experts advocate putting down 10% or 20% down. The more you pay at the start, the easier managing your mortgage will be. But, sometimes putting down a ton of cash can actually wind up compromising your quality of life or future saving goals. In some cases, it can actually hinder your ability to close on that dream home you spent so long saving up for.
Here are five reasons why you might want to dial down your down payment :
You’ll flush your emergency fund
Under no circumstances should buying a house be an emergency. Raiding your emergency fund for the sake of a giant down payment isn’t smart and it means you’re more likely to find yourself in a terrible position if you lose your job or wind up otherwise financially disabled. It is recommended to build a three to six month emergency fund – the longer the better, especially if you have kids and not touching it unless it’s truly an emergency. Remember : Building this emergency fund comes first, before buying the house or even building your 401K. If your home buying aspirations mean you’re skipping the safety net, you need to take a step back and save first.
You won’t be able to cover closing costs
Don’t let a massive specter of your down payment make you blind to all of the other expenses that come with closing a home, which can run about 3% to 6% of the purchase price. If you’ve put all your money toward one massive down payment, you’re sure to be surprised by the myriad of expenses – fees, taxes, the cost of an independent home inspector – all of which need to be paid once your sale is final. And of course, the ultimate closing cost : moving itself.
You might not be able to afford the mortgage
Have you ever heard the term “house poor”? It refers to buyers who have more house than they can afford, and are in over their heads with mortgage and tax payments. You don’t want to be one of these people. While this is common among buyers who can offer only the smallest possible down payments, it’s also a potential problem for people who put down more than they can afford. If 20% strains you, chances are good that the costs associated with owning that home are going to strain you too.
Your home might be empty
Lets face it, an empty home is hardly a home at all – and if you’ve spent all your money on the massive down payment, your home might be empty for a while. What’s the purpose of buying a new home if you can’t afford the sofa sectional to put in it? Especially if you’re moving from a smaller apartment into a home, there’s nothing sadder than an endless succession of empty rooms. It’s not that you need lavish accommodations, but it would be nice to be able to put some furniture in a guest room.
Retirement, vacations, college – all might be out of reach
So you’ve poured all of your money into a down payment, and you’re squeaking by just to pay the mortgage. The potential result : no money left over for the other things that matter in life. Large monthly bills begin to eat into your discretionary income, and even your retirement savings. Burdening yourself with more than you can afford is most likely a road to unhappiness. The greatest risk is that you don’t refocus your attention on retirement and long-term goals. The less stress there is about money, the better.
