The Perks of Putting 20% Down on a Home
Lauren Lawson
Lauren Lawson
If you’re thinking of buying a home, you’re probably wondering what you need to save for your down payment. Is it 20% of the purchase price, or could you put down less? While there are lower down payment programs available that allow qualified buyers to put down as little as 3.5%, it’s important to understand the many perks that come with a 20% down payment.
Here are four reasons why putting 20% down may be a great option if it works within your budget.
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.
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.
In a market where many buyers are competing for the same home, sellers often 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.
What is PMI? According to Freddie Mac:
“For homeowners who put less than 20% 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.
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.”
As mentioned earlier, if 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.
Many times, home sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their house to put 20% down on their next home. With the equity homeowners have today, it creates a great opportunity to put those savings toward a larger down payment on a new home.
If you’re looking to buy a home, consider the benefits of 20% down versus a smaller down payment option. Let’s connect so you have expert advice to help make your homeownership goals a reality.
As a dedicated REALTOR® in the heart of Napa, St. Helena, and Yountville, I find immense joy in connecting clients with their dream homes. My commitment runs deep, and those who've worked with me in these picturesque regions will vouch for the passion and professionalism I bring to every transaction. In fact, about 80% of my business thrives on the trust and referrals of past clients. Ensuring I'm always available and just a call away is my way of guaranteeing an exceptional customer experience. Whether you're envisioning the perfect home nestled in the scenic beauty of Napa or Sonoma Valleys, dreaming of the idyllic charm of wine country living, or simply longing for the allure of its captivating landscapes, let's embark on this journey together! As your local lifestyle expert, allow me to introduce you to the vibrant collection of experiences awaiting you in our communities.