Article Courtesy of Keeping Current Matters/The KCM Blog
If you’re thinking of buying a home this year, you may be wondering how much money you need
to come up with for your down payment. Many people may think it’s 20%
of the loan to secure a mortgage. While there are plenty of lower down
payment options available for qualified buyers who don’t want to put 20%
down, it’s important to understand how a larger down payment can have
great benefits too.
The truth is, there are many programs available
that allow you to put down as little as 3.5%, which can be a huge
benefit to those who want to purchase a home sooner rather than later.
Those who have served our country may also qualify for a Veterans
Affairs Home Loan (VA) and may not need a down payment.
These programs have really cut down the savings time for many potential
buyers, enabling them to start building family wealth sooner.
Here are four reasons why putting 20% down is a good plan if you can afford it.
1. Your interest rate may be lower.
A 20% down payment vs. a 3-5% down payment shows your lender you’re
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 they’ll likely be willing to give
you.
2. You’ll end up paying less for your home.
The larger your down payment, the smaller your loan amount will be
for your mortgage. If you’re able to pay 20% of the cost of your new
home at the start of the transaction, you’ll 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 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 that’s more likely to be approved. Therefore, the deal will be
more likely to go through.
4. You won’t have to pay Private Mortgage Insurance (PMI)
What is PMI? According to Freddie Mac:
“PMI is an insurance policy that protects the lender
if you are unable to pay your mortgage. It’s a monthly fee, rolled into
your mortgage payment, that is required for all conforming, conventional
loans that have down payments less than 20%. Once you’ve built equity
of 20% in your home, you can cancel your PMI and remove that expense
from your mortgage payment.”
As mentioned earlier, when 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 you’re unable to pay your loan. This
insurance isn’t required if you’re 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 down 20% on their next home. With the equity
homeowners have today, it creates a great opportunity to put those
savings toward a 20% or greater down payment on a new home.
If you’re looking to buy your first home, you’ll want to consider the benefits of 20% down versus a smaller down payment option.
Bottom Line
If you’re thinking of buying a home and are already saving for your
down payment, reach out to a trusted professional who can help you
decide what fits best with your long-term plans.
