If you read our, “How Long Does it Take to Save For a Down Payment?” article back in October, you know you don’t need a 20% downpayment to purchase a home because there are many alternative options available to you. However, while there are a plethora of options that you might qualify for, let’s look deeper into how putting 20% down could benefit you overall. You can find tried and true suggestions for saving up your downpayment here if you don’t have 20% saved up already. Keep in mind you can connect with us at any time to get personalized suggestions for what would work best for you in your unique situation.
In this article we are going to discuss how putting 20% down can help you get a lower interest rate, pay less overall, stand out in this competitive market, and avoid paying for PMI. Let’s get started.
Lower your interest rate:
A 20% down payment vs. a 3-5% down payment demonstrates to your lender that you are 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 will likely be.
Pay less overall:
The larger your down payment, the smaller your loan amount will be for your mortgage. If you are able to pay 20% of the cost of your new home at the start of the transaction, you will only pay interest on the remaining 80% of the cost of the home. If you put down 3.5 %, the additional 16.5% will be added to your loan and will accrue interest over time. This will end up costing you significantly more over the lifetime of your home loan.
Stand out in this competitive market:
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. Many buyers were hoping for the typical winter “slow-down” where they could see a less competitive market but that has proven not to be the case this year. Read more in our article, “Thinking the Housing Market is Going to Slow down this Winter? Think Again!” The seller in this current scenario gains the same confidence as the lender. You are seen as a stronger buyer with financing that is more likely to be approved. Therefore, there is a significantly higher chance that the deal will go through with a 20% downpayment.
Avoid paying for PMI:
You might be asking yourself, what is PMI? Freddie Mac explains,
“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.”
As mentioned earlier, if you put down less than 20% when buying a home, your lender will see your loan as having more risk than those who do put 20% down. PMI helps lenders recover their investment in you in the case that you are unable to pay your loan. However, this insurance is not required if you are able to put down 20% or more. In turn, this saves you from paying those extra fees.
Oftentimes, sellers looking to move 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. The equity homeowners have today, creates an advantageous opportunity to put those savings toward a larger down payment on a new home.
If you are considering buying or selling or just want to talk about this in more detail, connect with us. We are here to help.