If youre thinking of buying a home, youre probably wondering what you need to save for your down payment. Is it 20% of the loan, or could you put down less? While there are lower down payment programs available that allow qualified buyers to put down as little as 3.5%, its important to understand the many perks that come with a 20% down payment.
Here are four reasons why putting 20% down may be a great option if it works within your budget.
1. Your Interest Rate May Be Lower
A 20% down payment vs. a 3-5% down payment shows your lender youre more financially stable and not a large credit risk. The more confident your lender is in your credit score and your ability to pay your loan, the lower the mortgage interest rate theyll likely be willing to give you.
2. Youll End Up Paying Less for Your Home
The larger your down payment, the smaller your loan amount will be for your mortgage. If youre able to pay 20% of the cost of your new home at the start of the transaction, youll only pay interest on the remaining 80%. If you put down 5%, the additional 15% will be added to your loan and will accrue interest over time. This will end up costing you more over the lifetime of your home loan.
3. Your Offer Will Stand Out in a Competitive Market
In a market where many buyers are competing for the same home, sellers often like to see offers come in with 20% or larger down payments. The seller gains the same confidence as the lender in this scenario. You are seen as a stronger buyer with financing thats more likely to be approved. Therefore, the deal will be more likely to go through.
4. You Wont Have To Pay Private Mortgage Insurance (PMI)
What is PMI? According to Freddie Mac:
For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage.
It is not the same thing as homeowners insurance. Its a monthly fee, rolled into your mortgage payment, thats required if you make a down payment less than 20%. . . . Once youve built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment.
As mentioned earlier, if you put down less than 20% when buying a home, your lender will see your loan as having more risk. PMI helps them recover their investment in you if youre unable to pay your loan. This insurance isnt required if youre able to put down 20% or more.
Many times, home sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their house to put 20% down on their next home. With the equity homeowners have today, it creates a great opportunity to put those savings toward a larger down payment on a new home.
Bottom Line
If youre looking to buy a home, consider the benefits of 20% down versus a smaller down payment option. Lets connect so you have expert advice to help make your homeownership goals a reality.
