Pros and Cons of a 20% Down Payment
You may have been told to put down 20% on a new home, but did you know that’s not a requirement? Lenders approve loans with much smaller down payments. Putting 20% down does have benefits, but it also has downsides and risks. Today, we’re taking you through the pros and cons of a 20% down payment.
PRO: Lower Monthly Payment
Making a substantial down payment will reduce the amount you’ll have to borrow, which will translate to lower monthly payments. A large down payment will make you less risky from a lender’s perspective, and you might qualify for a lower interest rate. That will save you money every month and reduce the total amount you’ll pay in interest over the life of the loan.
PRO: Save on Private Mortgage Insurance
If you take out a conventional loan and you make a down payment of less than 20%, you’ll have to purchase private mortgage insurance to protect the lender if you don’t keep up with your loan payments. PMI might add several hundred dollars per month to your total housing payment. You’ll have to pay for PMI until you have at least 20% equity. With a down payment of 20% or more, you can avoid PMI. That can make your monthly payments easier to manage and save you a significant amount of money over time.
CON: Impact on Savings
Draining your savings account to make a large down payment can leave you financially vulnerable. Life can be unpredictable. Unexpected repairs, unanticipated medical bills, accidents, and more may leave you struggling financially without substantial savings to fall back on. If a 20% down payment would wipe out your savings, a smaller down payment may be a better option. Also, saving enough for a 20% down payment will leave less money for other financial priorities, such as investing for retirement or saving for your next vacation. Setting a lower target for your down payment can give you the flexibility to work toward other financial goals at the same time.
CON: Time to Save for a Down Payment
If you don’t already have substantial savings and don’t own a home you plan to sell, it can take years to save for a 20% down payment. In that time, a lot can change. For example, home prices can rise, and your goal can become even more out of reach. If real estate prices and interest rates are affordable, it might be better to buy a house with a smaller down payment than to wait so you can save more.
The Verdict: Think About Your Whole Financial Picture
Numerous factors can come into play when making financial decisions, and everyone’s situation is different. Consider your current circumstances and goals and find the balance that’s right for you. Talking with a Realtor and a Mortgage Lender can help you decide which down payment option works best for you! Contact us today to get started on your Real Estate journey!
