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Buying a home is a process of choices and decisions piled on choices and decisions. Some of those choices can be easily changed - the color of the walls or the placement of furniture in a particular room. Other decisions about the house cannot be changed later - what neighborhood it is located in or how much the down payment was.

This down payment is a very important decision. How much you put down is a determining factor in how much you will pay for the life of the loan. It does this by changing how much money is borrowed and may even change the interest rate you get offered on that balance.

TRADE-OFF

The amount of money to put down is a trade-off. A small down payment means that there is more cash in your bank account to handle emergencies (hot water heater failing or a pipe bursting in the basement for example) and the normal household expenses associated with moving in (curtains, drapes, maybe new furniture and moving van among others). The down-side to a smaller down payment is that the monthly mortgage will be bigger.

While it would be great to be able to pay cash for a house and have cash left over for other expenses, few of us can do that. The trick is to find that balance between committing cash to the down payment and ensuring that there is plenty of cash available for other needs.

PERCENT DOWN

The first concern, especially in a down economy, is getting the best interest rate available on the mortgage. This requires a larger down payment. Where mortgages are available with anything from 0-5% down, the best rates are reserved for 10-25% down or more. When you have flexibility in how big the down payment can be, asking where the interest break occurs can save thousands of dollars in the long term.

The percentage of the purchase in the down payment is also important for deciding if you will need to pay for PMI (Private Mortgage Insurance). PMI protects the bank against a borrower defaulting on their mortgage. It is usually required for loans with less than 20% down and can add tens to hundreds of dollars a month to the cost of a loan.

HOUSE RICH, CASH POOR

It is possible to make too large of a down payment. If you took every available dollar and put it into the down payment, there would be no funds remaining for the other necessary expenses involved in moving in and setting up in a new home. It would also mean that there is no emergency fund. Perhaps temporary, especially with a smaller monthly payment, but a short term cash crunch is no fun.

This is unusual and

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