3.5% Down or 20% Down?

August 12, 2020 by Paul Begich

Whether I’m working with a buyer to find a swanky new condo down in the North Loop or someone interested in house hacking and buying a duplex in South Minneapolis – the question always comes up: “should I put 3.5% down or 20% down?” Great question! Let’s dive into that here!

I’ll preface the following by saying there are certain instances where you simply CANNOT put down as little as possible (in most instances that’s 3 – 3.5%). These would be non-owner occupied properties and common interest communities with retail/commercial space in the building – each property and situation can be unique (that’s why I’m here to help!) but for the sake of this article let’s assume this is a property you’re GOING to personally occupy (this means you COULD put down 3.5%).

A little rewind for some context – I went to college with the notion I was going to be a mathematics major – that is, until I received a 19% on my advanced linear algebra midterm. I walked up to the professor following class and said, “Sir, you’re never going to see me again.” It was at this point I realized I wasn’t quite cut out to be in the mathematics field. Nevertheless, my mind still works in a very systemized way – do this, and then you get that. I take this very same analytical approach when diving into real estate numbers – which is why I share this story.

I look at the 3.5% down vs. 20% down as a question of your “return on equity.” For the sake of this conversation, I’m going to do a deep dive into one of our more recent North Loop condo listings – 515 Riverstation #115 listed for $280,000.

Let’s break down the monthly costs on the above by both down payments…

3.5% DOWN: $11,196 (down payment)
Property Taxes: $4,046/year
HOA Dues: $473/month
PMI: $150/month
MONTHLY TOTAL: $2,096/month

The above considers a 3.0% interest rate which is well in line with where the market is currently at – in fact, you may even be able to get closer to 2.5%. An important thing to note, that when putting down less than 20% you’ll need to pay monthly private mortgage insurance (which is noted above as PMI) this figure is roughly $50/month for every $100k financed which is how we get to $150/month.

20% DOWN: $55,980 (down payment)
Property Taxes: $4,046/year
HOA Dues: $473/month
MONTHLY TOTAL: $1,754/month

You’ll notice in the above we lose the private mortgage insurance monthly cost of $150 and the monthly cost is significantly more affordable.

Now this is where we’re going to super “mathy!”

What is the “return” on the additional “equity” or money you bring to the table by going the 20% down route vs. the 3.5% route? That’s the question and where in turn lines the answer of “should I put 3.5% or 20% down?”

The difference in equity (or again, money) between 3.5% down and 20% down is $44,784.

The money you “make” or save by doing 20% down vs. 3.5% down is the difference in monthly payment between the two – this difference is $342/month. This means that by going the 20% down route you’re “saving” $342/month. Had you gone the 3.5% route you’d be “spending” $342/month more. Still with me? Cool!

However, is this additional investment into the property worth the money saved? For that, we’ll do a simple calculation on your “return on equity!”

$342 multiplied by 12 to account for the yearly return gives us $4,104. Now take this number and divide that by total additional equity of $44,784 which equals the return on your equity of… 9.1%!

A nine percent return is a pretty darn good investment on your hard-earned money! Now, not everyone has $40,000 to throw around towards a down payment or would at least prefer the liquidity for other aspects of their lives.

All the buyers that I work with have different situations so I ALWAYS tailor my approach to my clients. But generally speaking, when rates are crazy low (like they are now) it makes sense to put less money down and utilize good debt. However, if you have the money to spare, you can see from the above that the return on your equity is pretty darn good and better than other areas (like the stock market, mutual funds, etc.).

I hope this article wasn’t too much to digest! This is just the way my brain works – especially when you’re talking about BIG life decisions!

I’m more than happy to dig into any of the above if you’re interested in chatting more about real estate – or if you’re in the market to buy or sell, lets chat!

You can find me on Instagram at @penthousepaul or by phone at 952-847-3406 and by email at Paul@DRGMpls.com.

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