One of the biggest upfront expenses of buying a home is the down payment. Many buyers often consider how much they should put down. While the down payment that is best for you varies, one thing is certain: 20% down payments are extremely beneficial. In today’s low rate market, there is often times no reason to put down the full 20%. However, there are plenty of perks of saving up 20% for your down payment on a property. Here are some perks of down payments that are 20% or more.
Interest Rates And Down Payments
With as much as 20% down on your home purchase, you are seen as more financially stable with your lender. Not only are you seen as more financially stable, but you are considered a lower risk to a lender because you have your own skin in the game. The more your lender is willing to trust you and your ability to pay your own loan, the more they will work with you. When your lender notices you are putting up a large amount of the cost, they will often times work your loan down to lower interest rates.
Out Of Pocket Costs With Down Payments
When you have a larger down payment, you are borrowing less money on a loan. If you are capable of putting down 20%, you will pay less interest over time as well. When putting 20% down, you are only paying interest on the remaining 80% of your loan. If you only put down 5%, you are stuck paying interest on the 15% difference. The more you put down now, the more money you will save over the course of your mortgage. It may seem like a daunting task now, but paying more upfront means paying back less over time.
Down Payments And Offers
In a seller’s market, many buyers are competing for the same slim inventory in many markets. Sellers genuinely like to see offers with higher down payments. When a seller sees a higher percent down, they gain some confidence in the legitimacy of your offer. Being seen as a strong buyer in today’s market will help you stand out in a super competitive market. The higher the down payment, the stronger you look, and the better chance they will chose your offer over others.
20% Down Means No PMI
For those who do not know what PMI (private mortgage insurance) is, Freddie Mac describes it as:
“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 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.”
Putting down less than 20% means that when you are buying a home, your lender will see you as a liability at first. This means that you are seen as a risk, as they have loaned you large sums of money for little upfront collateral. PMI helps lenders to recover some of their investment if you are ever able to repay your loan.