Buying Your First Home? Here Are 4 Perks of Putting A 20% Down Payment

If you are looking to buy a home this year, you are probably wondering how much you would need to put down. For those who are unable to put a 20% down, there are mortgage programs that only require a 3% to 5% down payment. But what if one has enough money in the bank to put down a 20%? Is it wise to use your life savings to purchase a home? In reality, rather than spending less, a 20% down payment puts you in a stronger position for house ownership in the long run.

Here are four reasons putting a 20% down payment is a good plan.

One of the biggest perks of putting a 20% down payment on a home is that you will avoid paying private mortgage insurance also known as lender’s mortgage insurance. Borrowers who put down less money may place their loans at a higher risk for lenders. As a result, PMI safeguards lenders in the case of a default.

PMI usually costs between 0.5 to 1.5 percent of your mortgage debt, depending on your loan amount and credit score, and is not always tax-deductible. For example, if you put down 5% on a $400,000 home (i.e. 20,000) and your PMI is 1% then you will pay an extra $315 per month. This will be included in your monthly mortgage payments and is not usually canceled until your home has at least 20 % equity. Ouch!

In a perfect setup, homes would increase or maintain their value over time. However, they can sometimes go down resulting in a loss of equity. Unfortunately, a small down payment or no down payment may not be sufficient to protect you against these drops. Depending on how much your home value declines you could end up with negative equity or find yourself “underwater” (meaning you will owe more money than the house is worth).

This is not a good idea because if you decide to move due to financial reasons or because you found a new job you will have to pay the difference before you sell your current home. Therefore, putting down less than 20% is a risky proposition.

Another benefit of putting a 20% down is that you can enjoy a lower mortgage payment and a lower interest rate. Paying more money down means a smaller mortgage, which in turn means cheaper and more manageable monthly mortgage payments.

A 20% down payment demonstrates to your lender that you are not a high-risk applicant. The higher your lender’s confidence the lower will be your interest rate. A low-interest rate will lower the amount of money you pay in interest throughout the term of the loan and help you save thousands of dollars over the life of the loan.

When multiple buyers are competing for the same home in a Sellers’ Market, you need to come up with your strongest offer right upfront. While pricing is undoubtedly a major factor, sellers will examine every aspect of your offer, including the size of your down payment. Sellers obtain the same level of confidence as lenders with a 20% or higher down payment. You will be considered as a more capable buyer with a better chance of qualifying for a loan. As a result, your offer will likely be accepted above other offers that have a lower down payment.

Bonus Tip: If you have decided to put 20% down, how do you get there? Take a look at our blog “How to Save for Down Payment of Your Dream Home” before you start your home buying journey.

Ratebeat Mortgage has a wide range of mortgage options for all sorts of customers, including first-time homeowners, repeat buyers, military personnel, and others. Let’s connect so you can get expert advice on how to make your dream of owning a home a reality.