The Benefits of a 20% Down Payment

If you are in the market to buy a home this year, you may beconfused about how much money you need to come up with for yourdown payment. Many people you talk to will tell you that you needto save 20% or you won’t be able to secure a mortgage.

The truth is that there are many programs available that let youput down as little as 3%. Those who have served our country couldqualify for a Veterans Affairs Home Loan (VA) without needinga down payment.

These programs have cut the savings time that many families wouldneed to compile a large down payment from five or more years downto a year or two. This allows them to start building family wealthsooner.

So then, why do so many people believe that they need a 20% downpayment to buy a home? There has to be a reason! Today, we want totalk about four reasons why putting 20% down is a good plan, if youcan afford it.

1. Your interest rate will be lower

Putting down a 20% down payment vs. a 3-5% down payment showsyour lender/bank that you are more financially stable, thus a goodcredit risk. The more confident your bank is in your credit scoreand your ability to pay your loan, the lower the rate they will bewilling to give you.

2. You’ll end up paying less for yourhome

The bigger your down payment, the lower your loan amount will befor your mortgage. If you are able to pay 20% of the cost of yournew home at the start of the transaction, you will only payinterest on the remaining 80%. If you put down a 5% down payment,the extra 15% on your loan will accrue interest and end up costingyou more in the long run!

3. Your offer will stand out in a competitivemarket!

In a market where many buyers are competing for the same home,sellers like to see offers come in with 20% or larger downpayments. The seller gains the same confidence that the bank didabove. You are seen as a stronger buyer whose financing is morelikely to be approved. Therefore, the deal will be more likely togo through!

4. You won’t have to pay Private MortgageInsurance(PMI)

Simply put, PMI is “an insurance policy thatprotects the lender if you are unable to pay your mortgage.It’s a monthly fee, rolled into your mortgage payment, thatis required for all conforming, conventional loans that have downpayments less than 20%.”

As we mentioned earlier, when you put down less than 20% to buya home, your lender/bank will see your loan as having more risk.PMI helps them recover their investment in you if you are unable topay your loan. This insurance is not required if you are able toput down 20% or more.

Many times, home sellers looking to move up to a larger or moreexpensive home are able to take the equity they earn from the saleof their house to put down 20% on their next home.

If you are looking to buy your first home, you will have toweigh the benefits of saving a 20% down payment vs. the time andcost of continuing to rent while you save that amount.

Bottom Line

If your plan for your future includes buying a home andyou’re already saving for your down payment, let’s gettogether to help you decide what down payment size best fits withyour long-term plan!