Three Percent Or 20 Percent - Which Is The Smarter Down Payment Strategy? - 2

The case for as little down as possible

The biggest roadblock to homeownership for many people is coming up with the down payment, so minimizing that expense sounds great, right? "The good news is a first-time buyer can purchase a home for a little as three percent down - and even no money down in some cases," said U.S. News.

But is that a smart move?

"The less you put down, the higher the mortgage insurance is," Casey Fleming, author of "The Loan Guide: How to Get the Best Possible Mortgage" and a mortgage professional in the San Francisco Bay Area, told them. "With five percent down, the mortgage insurance is quite high."

Yep, there's that pesky PMI again, which, for many first-time buyers, pushes their monthly payment to a level they're not comfortable with. Another bummer about PMI: "If you need to pay PMI, the size loan you can get will be slightly smaller, to allow for the bigger payment," they said.

You may also have trouble qualifying for a loan even if you have a high enough credit score because you don't have enough cash reserves; if you are using all your savings for the down payment and the lender questions where the funds for your closing costs, taxes and insurance, and any needed repairs are coming from, you could have a problem.

But, on the flip side, a smaller down payment will up your rate of return, said The Mortgage Reports. "Consider a home which appreciates at the national average of near five percent. Today, your home is worth $400,000. In a year, it's worth $420,000.

Irrespective of your down payment, the home is worth twenty-thousand dollars more. That down payment affected your rate of return. With 20 percent down on the home - $80,000 - your rate of return is 25 percent. With three percent down on the home - $12,000 - your rate of return is 167 percent."

Even when you add in the PMI and a higher interest rate, the equation comes out in favor of the lower down payment. "With three percent down, and making adjustments for rate and PMI, the rate of return on a low-down-payment loan is still 106 percent - much higher than if you made a large down payment. The less you put down, then, the larger your potential return on investment."