What Are the Benefits of a 20% Down Payment?

 

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. 

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. 

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)
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.

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. Also, reach out to a trusted real estate professional who can help you decide what fits best with your long-term plans.