Let’s examine the advantages and disadvantages of a 20% down payment on a house. A 20% down payment is the often recommended ideal down payment amount for most loans and lenders. If you can afford to put 20% down, you’ll reap the following key benefits: You’ll need to put 20% down to avoid paying private mortgage insurance (PMI) on a conventional mortgage loan. PMI is insurance that protects a lender if a borrower defaults on their home loan.Pros Of Putting 20% Down
No PMI
Fortunately, PMI isn’t forever. If you put down less than 20%, you can ask your lender to remove PMI once you’ve reached 20% equity in your home.
Equity is the difference between how much your home is worth and the amount you owe on your mortgage. Here are two ways to build equity:
- Your home increases in value
- You pay off your mortgage principal through your monthly mortgage payments
Once borrowers build 22% equity in their homes, most lenders automatically cancel PMI.
Better Interest Rates
The interest rate is a percentage of the original loan amount that a lender charges you each month for borrowing money.
The higher your down payment, the more attractive you are to lenders. Putting down 20% may provide access to a lower interest rate. And just a 1 – 2 mortgage point drop in your interest rate can save you thousands of dollars over the life of your loan.
Lower Monthly Payments
The larger your down payment, the less money you’ll borrow. The less you borrow, the smaller your monthly mortgage payments will be, leaving extra funds to budget for repairs and other monthly expenses.
Competitive Edge Over Other Buyers
Home sellers often prefer to work with buyers who make at least a 20% down payment. A bigger down payment is a strong signal that your finances are in order, so you may have an easier time getting a mortgage. This can give you an edge over other buyers, especially when the home is in a hot market.
Cons Of Putting 20% Down
Putting 20% down isn’t right for every buyer. Some buyers can’t afford it. Some buyers would prefer to have extra cash set aside for future repairs and expenses. If you’re figuring out how much down payment you need to buy a house, consider these drawbacks:
Less Financial Flexibility
Once you put money down on your mortgage, it’s not easy to get it back. If you think you might need the money for something else later on, it may make more sense to put down less and build your savings.
Less Money For Repairs
Homes that only need a few minor repairs can be a bargain for new buyers. If you anticipate making significant repairs, the larger your down payment, the less money you’ll have to spend on repairs and maintenance.
More Time Required To Save
For most people, saving for a down payment can take months, years or decades. Waiting until you reach the 20% down payment threshold may produce a huge opportunity cost. Delaying may result in significant costs to buyers due to rising home prices and soaring rents. In the long run, it may be more affordable to buy a home sooner than continue to pay rent while you save for a 20% down payment.
