If you are wondering how much you should put as a down payment when buying an investment property, do not worry, you are not alone. This is one of the most frequently asked questions that mortgage professionals face. The minimum down payment for investment property might sound intimidating, mainly if you are new to real estate investing. This is due to the fact that as a new real estate investor, you simply do not have the financial assets to be able to invest in properties without taking a mortgage. Moreover, there are all the papers you need to fill in as well as the documentation you need to take into consideration when it comes to the down payment.
Usually, you hear that the minimum down payment for investment property should be at least 20% of the total purchase price of your real estate investment. However, there are many factors that might have an effect on the down payment. Are you curious and willing to learn more about the minimum down payment for investment property and want to know what it should be? Keep reading to find interesting and useful information on this real estate topic!
Related: 10 Different Ways to Purchase a Property with No Money Down
#1 What Is a Down Payment?
The down payment is a type of payment which constitutes a part of the total price of your real estate investment. This payment is made in advance when you are planning to start financing real estate investments. In other words, it is the portion of the total price that you pay from your own pocket in order to receive a mortgage loan. In addition, in most cases real estate investors use an electronic way of making the down payment as with the development of current technologies actual cash payments are quite rare. Typically, the down payment is a part of the mortgage loan you take. Whenever you see a “zero down” sign in the loan contract, it is meant that the down payment is not required for this offer. However, it would be a great idea to still implement the payment. In most cases, down payments cover a significant percentage of the total price, which eases the process of returning the loan afterwards. It is widely popular that banks and traditional lenders prefer a down payment of at least 20%. Moreover, they refer to 20% as the minimum down payment for investment property. The reason behind this is the security they get when giving the loan. This results in better loan terms for the real estate investor as well.
Related: Why You Shouldn’t Pay Put Less than 20% Down Payment
#2 Why Is It Better to Put a Bigger Down Payment?
There are several reasons why a bigger down payment is better than putting a smaller amount of money. Mainly, it is about saving your financial assets in the long run. Here are the three main reasons why it is worth it to put a bigger down payment when financing real estate investments:
- Lower Monthly Payments
It is always risky when investing in real estate. “Why is this so?”, you may ask. Well, you as a real estate investor take the risk of losing money on the property you are financing. Additionally, you take the risk of not being capable of paying back your loans. The final result could be ending up with a huge debt. However, if your plan is to be a successful real estate investor, you should learn how to do business by constantly being involved in real estate. For instance, with a down payment lower than 15%, you are putting yourself at risk of paying higher monthly mortgage payments than if your down payment is 20%, which is also known as the minimum down payment for investment property. This might not seem as a big deal at the beginning. However, it might turn out as an obstacle in the long run.
- Lower Interest Rates
When you as a real estate investor decide to put a higher percent of down payment, in any case it means having less interest. For instance, if your minimum down payment for investment property is 20% from the total price of $350,000, then your interest will be $93,000 during the term of your mortgage. Nonetheless, if your minimum down payment for investment property is 10%, the interest will be $108,000. With 20% down payment, you would be able to save $15,000, a sum which might make a big difference in the real estate investing business of every new real estate investor.
- Avoiding Private Mortgage Insurance
As previously described, banks prefer that real estate investors put at least 20% as a down payment. According to financing institutions, 20% is the absolute minimum down payment for investment property. However, when the down payment is lower than 20%, you will most certainly be charged additionally with private mortgage insurance tax. It is important to note this. If you decide to save some cash from the down payment, you might face some additional higher fees.
Related: Everything You Need to Know About Reverse Mortgage
#3 The Difference Between the 5% Down Payment and the 20% Down Payment
To illustrate the difference between the 5% and the 20% down payment, we will make some calculations. Imagine that the price of a house is $300,000, and the interest rate is 4.25%. The loan is for a period of 30 years with a fixed mortgage. Investor A establishes that the minimum down payment for investment property is 5%, while investor B decides that the minimum down payment for investment property is 20%. It is possible to state immediately that investor A is borrowing a bigger amount than investor B. Therefore, investor A will experience a higher interest rate. Additionally, he/she will need to pay a private mortgage insurance. Thus, the general monthly mortgage payment is going to be higher. Therefore, that real estate investor will pay to the bank a huge amount of money, which could have been avoided and used in order to make money in real estate. If you have the possibility to do so, put a bigger down payment.
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