Final answer:
The recommended down payment for purchasing a home is usually 20%, which can help avoid mortgage insurance and secure better loan terms. However, some buyers may opt for lower down payments of 0-3.5%, albeit with additional costs over time. Market history shows the risks associated with low to no down payments during housing market downturns.
Step-by-step explanation:
When it comes to determining the golden percentage of down payment for purchasing a home, a common benchmark is the 20% rule. This means that for a home with a purchase price of $100,000, a down payment of $20,000 is generally recommended. The down payment is an important aspect as it directly affects the mortgage amount. A higher down payment can lead to better loan terms and might eliminate the need for mortgage insurance, an extra cost added to the mortgage that protects the lender in case of default.
However, not all potential home buyers can afford a 20% down payment, and in such situations, there are options for a smaller down payment ranging from 0-3.5%. It's important to remember that these lower down payment options may require purchasing mortgage insurance, which increases the overall cost of the mortgage over time. This was particularly relevant leading up to and during the housing bust, where homeowners found themselves with mortgage values much higher than their home's market value.
Throughout history, as exemplified during the U.S. housing market growth between 1990 and 2006, homeownership was considered a safe financial investment, with equity being a significant part of many Americans' net worth. Nevertheless, market changes demonstrated that when home prices fall, those with little to no down payment can find themselves in a financially precarious position.