down payment on a house

4 reasons to put 20% down (if you have it)

Bethany Ramos First-Time Homebuyer, Home Buying, Homeowners

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Maybe you’ve already owned a home, or maybe you’re hoping to become a homeowner for the first time. Either way, there are bound to be questions about how much you need to save and where you can find assistance. Let us help you get these answers fast.

When to put a 20% down payment on a house

Paying more for a down payment can be a good idea if it fits into your budget. Here’s why:

1. You could be eligible for a lower interest rate.

When you put down 20 percent versus 3 to 5 percent, you tell your lender that you have financial stability and carry less risk. When your lender has more confidence in your credit score and your capability of paying your mortgage on time, they may be more willing to lend to you at a lower mortgage interest rate.

2. You’ll pay less for your house in the long run.

The larger the amount of your down payment, the smaller the amount of your home loan will be. So, if you have 20 percent of the cost of your house to put down upfront, you’ll only be charged interest for 80 percent of its purchase price. Put 5 percent down, and the additional 15 percent will be lumped into your loan to accrue interest. This will ultimately cost you extra over the life of your mortgage.

3. You can gain a competitive advantage.

Today’s market is still booming. Buyers continue to compete for the same house. Sellers get to be picky. They may show preference to an offer coming in with a 20-percent (or even bigger) down payment. Similar to point number one, this gives a seller confidence in a buyer. When you’re seen as a buyer with strong financing, it communicates to a seller that the deal is likely to close on time.

4. You’ll avoid paying PMI.

What’s PMI? Freddie Mac explains:

“For homeowners who put less than 20-percent 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.”

Note that PMI isn’t the same as homeowner’s insurance. Instead, it’s added on as a monthly fee, lumped into your mortgage payment and required if your down payment is less than 20 percent. Once you build up to 20-percent equity in your house, you’re eligible to cancel PMI and drop this added cost from your monthly mortgage.

PMI may be tacked on when you put less than 20-percent down since your lender will view your loan as riskier. In the event that you’re unable to pay your mortgage, PMI will protect the lender’s investment. You won’t be required to pay PMI if you pay 20 percent or more for your down payment.

If you happen to be a home seller hoping to trade up to a larger house or a home in the next price range, this may be a no-brainer. With the large amount of equity homeowners have recently accumulated, it’s highly probable that you can leverage the profits from the sale of your home to put down at least 20 percent on a new house.

What if you don’t have 20%? You still have options

There’s no doubt that putting 20-percent down can be beneficial for those who have it. But plenty of other affordable mortgage programs exist, many geared toward first-time buyers with down payment minimums ranging from 0 to 3.5 percent.

Not knowing about these programs is what’s holding many homebuyers back. According to a recent LendingTree survey, over half of consumers said that saving up for a down payment is their biggest hurdle to homeownership.

This is likely because most homebuyers believe 20-percent down is required to buy. But these days, you don’t necessarily need a 20-percent down payment. Saving for a 3-percent down payment may be quicker than you think, depending on housing prices in your area.

While Mint data shows that it could take around four years to set aside 20 percent, you could reach your 3-percent down payment minimum savings goal in under a year, based on these same estimates. For the many homebuyers who want to purchase now before rates and home prices increase any further, buying sooner at a lower down payment amount may offer more financial benefits.

To pay or not to pay? Click here to prequalify and find out if you’re eligible for a low (or no) down payment.

If one of these down payment assistance options is available to you, your savings time could be even shorter:

Family member assistance.

A Realtor.com® report finds that 52 percent of recent homebuyers obtained down payment aid from loved ones. “In addition to saving, over half of first-time homebuyers received help with down payment funds from family or friends. Approximately 20 percent received a loan from parents, while 12 percent borrowed money from siblings,” the report stated.

If getting gifted down payment funds from a relative sounds probable, talk with your loan officer before accepting any money. You’ll want to ensure the process is documented to meet your mortgage’s requirements. Documenting down payment cash received will help your loan to be processed properly, without affecting how you qualify.

Programs for down payment assistance.

Still, not all homebuyers have a family member who’s able to help out with funds for a down payment. Thankfully, there are dozens of programs out there offering down payment assistance, often in local areas broken down by neighborhood, city, or county. Some of these programs are made especially for first-time homebuyers.

But sadly, only a small portion of homebuyers know these programs exist. This is why it’s essential to do your homework. Familiarize yourself with your DPA (down payment assistance) options before preparing to buy. See what type of down payment assistance is available in the area where you’d like to live, and you’ll have the information you need to reduce or possibly eliminate your down payment.

Find the down payment amount that fits into your life

How’s this for personalized service? Prequalify for your mortgage from anywhere. Connect with a local loan officer who can assess your unique financial profile. Get guidance on which loan program and down payment amount will provide the most benefits. To get started: Prequalify now.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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