While it’s challenging to buy a home with a down payment, programs exist that allow qualified buyers to put down as little as 3.5%. A VA Loan will let you put down 0%. Why would anyone put down as much as 20%?
- It Will Lower Your Interest Rate
A 20% down payment demonstrates to a lender that your financial situation is more stable and, therefore, presents a lower credit risk. The lower the credit risk you are, the lower the interest rate that the lender may be willing to extend to you.
2. Overtime You Will Pay Less for Your Home
The more considerable you put down on a home, the smaller the actual loan is. Say, for example, you are purchasing a $500,000 home, and you put down 20%, your loan would be for $400,000, and over 30 years would cost you approximately $822,960. If you put down 10%, your loan would be for $450,000 and would cost you roughly $952,560 over the life of the loan.
3. It Will Make Your Offer Stand Out
Sellers and listing agents want the deal to come to fruition when they accept an Offer to Purchase and make it to the closing table. When an agent or seller sees a 20% down payment, they gain confidence in an offer similar to the reaction of a lender. The higher the down payment, the more trust a seller is likely to have in your proposal. A 20% down payment can make a difference in how your offer is viewed.
4. Eliminate Private Mortgage Insurances (PMI)
Freddie Mac describes this way:
For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy that protects the lender if you cannot pay your mortgage.
It is not the same thing as homeowner’s insurance. It’s a monthly fee rolled into your mortgage payment that’s required if you make a down payment of less than 20%. Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your monthly payment.”
PMI helps lenders recoup their investment if they cannot meet your loan obligation. This insurance isn’t required if you’re able t put down 20% or more.
Homeowners will often take the equity they earn from the sale of one home and put it towards a larger, more expensive home. In these times, the equity is likely to mean that a buyer can put 20% down on a new home.
Bottom Line
If you can afford it, putting 20% as a down payment on a new home does benefit you. Ask a real estate expert for advice to help make your goals a reality.