The Benefits of 20 percent Down Payment When Buying a Home
If you are planning to buy a home, you may be confused about how much money you need to come up with for your down payment. Many people you talk to will tell you that you need to save 20% for down payment. The truth is that there are many programs available that let you put down as little as 3% or even 0% down payment home buying program. Those who have served our country could qualify for a Veterans Affairs Home Loan (VA) without needing a down payment. These programs have cut the savings time that many families would need to compile a large down payment from five or more years down to a year or two. This allows them to start building family wealth sooner.
So then, why do so many people believe that they need a 20% down payment to buy a home? There has to be a reason! Here are why putting 20% down is a good plan, if you can afford it.
Your interest rate will be lower
Putting down a 20% down payment vs. a 3% to 5% down payment shows your lender that you are more financially stable, thus a good credit risk. The more confident your bank is in your credit score and your ability to pay your loan, the lower the rate they will be willing to give you.
You’ll end up paying less for your home
The bigger your down payment, the lower your loan amount will be for your mortgage. If you are able to pay 20% of the cost of your new home at the start of the transaction, you will only pay interest on the remaining 80%. If you put down a 5% down payment, the extra 15% on your loan will accrue interest and end up costing you more in the long run!
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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 that the bank did above. You are seen as a stronger buyer whose financing is more likely to be approved. Therefore, the deal will be more likely to go through!
You won’t have to pay Private Mortgage Insurance (PMI)
Simply put, 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%.”
As we mentioned earlier, when you put down less than 20% to buy a home, your lender will see your loan as having more risk. PMI helps them recover their investment in you if you are unable to pay your loan. This insurance is not required if you are able to put down 20% or more.
Should you make a 20% mortgage down payment?
If you are a home buyer with a lot of money saved up in the bank, for example, but you have relatively low annual income, making the biggest down payment possible can be sensible. This is because, with a large down payment, you will lower your loan amount and reducing the size of your monthly payment.
Maybe you may have a good household income but very little saving in the bank. In this instance, it may be best to use a low or no-down-payment loan, while planning to cancel your mortgage insurance at some point in the future.
Bottom Line
If you are looking to buy your first home, you will have to weigh the benefits of saving a 20% down payment vs the time and cost of continuing to rent while you save that amount. If your plan for your future includes buying a home and you are already saving for your down payment, meet with a local real estate professional who can help you decide the down payment size that best fits with your long-term plan!
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ area, we hope you will consider us. Contact us today for complimentary consultation.
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