Do I Need to Put 20% Down?
Home buyers across the country ask if it is required to put 20% down on a house to qualify for a new home. It is not difficult to grasp why that “20%” figure strikes such fear into the hearts of potential homeowners, especially the young and not-so-wealthy. The average for home sales has reached $347,000 as of 2015. When you consider that 20% of an average sold home, priced above, is more than $69,000, it resonates that one needs serious savings to provide a 20% down payment.
The Amount of Money You Pay Up Front is Impacted by the Following:
- How your loan application is viewed by lenders
- Your interest rate
- If you will need to pay for private mortgage insurance (PMI)
- The Type of loan you qualify for
Fortunately, the 20% “rule” is considered a myth today. In fact, according to U.S. News & World Report, many lenders will still finance a home sale with less than 20% down. Keep in mind that even if you put down a 20% payment on a house that offers potential benefits, it is not a necessity. There are many loan programs that exist primarily for home buyers that are not able to set aside tens of thousands of dollars. A growing number of home buyers simply do not put 20% down.
Here are some pros and cons of paying a 20% down payment:
Why a 20% Down Payment is Important:
- Higher down payments equal lower monthly payments for you.By paying more up front, you will have smaller monthly payments. Not owing as much money enables your debt-to-income ratio (the total amount paid toward debt every month as compared to your monthly income) to become even lower. Lenders consider your debt-to-income ratio when determining whether you qualify for a loan.
- A larger down payment can get you a lower interest rate on your loan. That means that you will pay less overall for the life of the loan. That equates to more money in your savings.
- Putting 20% down allows you to avoid private mortgage insurance (PMI). Making a 20% down payment means you will not be required to purchase private mortgage insurance. PMI is usually a requirement if your down payment is less than 20%. PMI premiums, added to your mortgage, require more money from you.
The Benefits of Not Paying a 20% Down Payment:
- You can become a homeownerSaving the money required for a 20% down payment requires years. Working with a lender that accepts lower down payments will help you purchase your home in less time.
- Waiting may cause you to spend more. Interest rates tend to fluctuate causing prices generally, to rise over time. The money saved today will likely buy you less house in a few years. Consider the following:
If you pay $10,000 down today at a 4% interest rate or wait several years when you can afford to pay more, such as a down payment of $60,000, but with an interest rate that has risen to 7% – you will end up paying more overall just in interest.
- A homeowner builds equity as a result of owning their home. Waiting years to become a homeowner while saving money may result in the loss of time and thus the loss of equity.
- Purchasing a home is for everyone. Whether you can afford 20% down or something less, buying a home is within reach for everyone. Lenders are a great source to learn about the many options available and to find the program that is right for you and your unique needs.