I recently have had 2 clients trying to decide between putting the smallest down payment possible on a house or putting extra money down on that house for safety and peace of mind. Currently, the smallest down payment possible is 3.50% for a FHA loan unless you are a veteran and qualify for a Veterans loan with no money down. 

I want to deal with the emotional question which loan is safer: a loan with 10% or more down or a loan with 3.50% down? If we were to poll Americans on this exact question, I would bet that 90% of Americans would say the loan with 10% or more down is safer. And I would say you are "correct".

But, for whom? Let me tell you a story one of my clients told me a couple years ago. One of her parents' neighbors had owned his home for 27 years and had been paying on their mortgage for 27 years. He was just 3 years from paying off his house in full. Then, catastrophe struck and he no longer had any income to make any more mortgage payments. He had lots and lots of equity in his home; but because he had no job and no income he could not get a new mortgage or line of credit to make the house payment with. And thus he LOST his home to foreclosure and he lost over $300,000 in equity!

I bet before his catastrophe struck that he felt "very safe" because he had a lot of equity in his house. It made him feel safe. But, what he did discover through the School of Hard Knocks? That your home's equity is NEVER SAFE or guaranteed until the house is completely paid off.  

Who truly WAS safe after 27 years of payments from the borrower? The BANK! The BANK had the safety and peace of mind, not Mr. Homeowner.

The same principle applies when we choose to make a larger down payment than needed to buy a home. We "feel" like our home and our loan is safer to us; but, it is NOT! It's safer for the bank, not us as they have more certainty of getting their money back as they have more of your money.

So, what's the safer loan? I will discuss that tomorrow along with the fact that most borrowers are confusing safety with liquidity.