Putting down 20% on a home purchase can reduce your monthly payment, eliminate private mortgage insurance and possibly give you a lower interest rate. However, it can take a long time for first-time homebuyers to achieve this goal, and it may not be as beneficial during periods of low interest rates, particularly if you have to drain your savings.
Its not required to make a 20% down payment when buying a house, but there can be some financial benefits if you do. At the same time, putting down that much money could also come with some potential drawbacks.
As a result, its important to think carefully about your situation and your objectives to make the best decision for you.
Putting 20% down on a house can seem like a daunting task, especially for first-time homebuyers However, there are several financial benefits that make saving for a 20% down payment worth the effort. Here’s an overview of the key advantages of putting 20% down when purchasing a home.
Avoid Private Mortgage Insurance
Private mortgage insurance (PMI) is an additional cost required by most lenders when your down payment is less than 20% of the purchase price. PMI protects the lender in case you default on the loan. This insurance can add an extra 0.5% to 1.5% of the total loan amount to your monthly mortgage payment.
With a 20% down payment, you can avoid paying this expensive premium. On a $200,000 home loan, PMI could cost an additional $100 to $300 per month Over the life of a 30-year mortgage, that adds up to thousands of dollars in savings
Lower Monthly Payments
Since you are borrowing less money with a 20% down payment, your monthly mortgage payments will be lower compared to putting less money down. This improves affordability, especially when interest rates rise.
For example, on a $200,000 home with a 4% interest rate:
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With 20% down ($40,000), the mortgage amount is $160,000. The monthly principal and interest payment is around $760.
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With 10% down ($20,000), the mortgage amount is $180,000. The monthly P&I payment is around $850.
That’s a monthly savings of $90 just by putting down 20% instead of 10%.
Lower Interest Rates
Lenders view borrowers who make a 20% down payment as lower risk. This allows you to qualify for the best mortgage rates. Even a small reduction in your interest rate can save thousands over the loan term.
On a $200,000 loan amount:
- 4% interest rate = $955 monthly P&I payment
- 3.5% interest rate = $910 monthly P&I payment
That 0.5% reduction in rate saves you $45 per month, or $16,200 over 30 years.
Build Home Equity Faster
With a larger down payment, you immediately have more equity in your home. This equity acts as a financial cushion if home values decline. It also gives you the option to tap into your home equity if needed, using products like a home equity loan or home equity line of credit.
You build equity each month as your mortgage loan balance decreases. With 20% down, you start off with more equity and will reach the crucial 20% equity threshold faster. At that point, you can eliminate PMI and unlock additional benefits.
Improved Debt-to-Income Ratio
Lenders determine how much you can borrow for a mortgage by calculating your debt-to-income (DTI) ratio. DTI compares your total monthly debt payments to your gross monthly income.
The lower your DTI, the more mortgage and other types of credit you can qualify for. A higher down payment amount lowers your monthly mortgage payment, thereby lowering your DTI. This allows you to qualify for a larger loan than you could with a smaller down payment and higher DTI.
Potentially Better Loan Terms
In addition to a lower interest rate, putting 20% down can help you qualify for better loan terms from your lender. For conventional loans, a down payment of at least 20% makes you automatically eligible for the best loan terms each lender offers.
Better terms may include lower fees, more flexible repayment options, and improved options for dropping PMI. You’ll also have more bargaining power to negotiate the best offer if you put down 20%.
Stronger Borrowing Position
Having 20% equity provides a critical buffer if you fall on hard times and need to sell. This reduces your risk of ending up underwater on the loan or being forced into a short sale.
It also puts you in better position to qualify for a future mortgage refinance or home equity loan. Lenders view you as lower risk when you have a good amount of home equity built up.
Potentially Win Competitive Bids
In a hot sellers market, putting down 20% could give your offer an edge over competing bids with smaller down payments. Sellers may choose the strongest offer to minimize the chance of the buyer’s financing falling through.
Drawbacks to Consider
While there are lots of financial upsides, aiming for a 20% down payment also comes with some potential drawbacks:
- It can take years to save up a 20% down payment, delaying homeownership
- You may deplete most of your savings in the process
- Investment returns may be higher if you put less down and invest the difference
- Low mortgage rates reduce the savings versus paying PMI
- Government-backed loans allow less than 20% down without PMI
Carefully weigh the pros and cons for your personal situation before deciding how much to put down. Don’t stretch too thin just to reach 20%—a slightly smaller down payment can still provide benefits. Connect with a mortgage professional to discuss your options.
Tips for Reaching a 20% Down Payment
If you’ve decided to take the plunge and save for a full 20% down payment, here are some tips to help you reach your goal faster:
- Start saving early, as soon as you begin considering homeownership
- Create a reasonable savings plan and timeline
- Set up automatic transfers to move money from your paycheck directly into savings
- Reduce discretionary spending and stick to a detailed budget
- Earn extra income through a side gig, freelancing or part-time work
- Consider temporarily living with family to ramp up savings
- Take advantage of any 401(k) or employee retirement plan matching
- Limit large purchases that aren’t absolutely necessary
- Use a high-yield savings account to earn more interest
- Apply any tax refunds, bonuses or monetary gifts to your down payment fund
Alternatives to 20% Down
If putting down 20% is out of reach, all hope is not lost. There are many loan programs that allow smaller down payments:
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FHA loans require just 3.5% down and allow gift funds for the down payment.
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VA loans are available with 0% down for qualified veterans and service members.
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USDA loans offer 0% down options for properties in rural areas.
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Conventional 97 loans allow down payments as low as 3% along with expanded gift funds eligibility.
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Down payment assistance programs provide grants, loans and other options to cover some of your required down payment amount.
The bottom line is that 20% down has financial advantages, but isn’t mandatory. Carefully consider both the benefits and drawbacks for your situation when deciding how much to put down.
Pros and Cons of a 20% Down Payment
As you decide how much to put down on your new home, its important to think about how your down payment will impact your financial situation, both now and in the future. Here are some advantages and disadvantages to consider with a 20% down payment.
Do You Have to Put 20% Down on a House?
While a 20% down payment has long been recommended, its not a requirement. Depending on the type of loan you have, the minimum required may range from 0% to 10%:
Benefits of 20% Down Payment on a House | Repeat vs First Time Buyers
FAQ
Why do sellers prefer 20% down?
Sellers prefer 20% down because it signals a lower risk of the deal falling through. Lenders are more confident in approving buyers with more equity, making the sale more secure and likely to close without complications.
Can I afford a $300 k house on a $70 k salary?
Can I afford a $300K house on a $70K salary? If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.
What are the disadvantages of a large down payment?
What happens if you put 20% down?
… can eliminate mortgage 20% down payment insurance costs, reducing month-to-month payments and building equity much more rapidly for huge long-term savingsDec 2, 2024
What are the benefits of a 20% down payment?
Another benefit is that higher down payments typically mean lower mortgage interest rates. The less money a homeowner borrows, the less risky their loan is for a mortgage lender. Lenders reward this lower risk with a reduced rate and lower long-term borrowing costs. Finally, a 20% down payment lets you avoid mortgage insurance.
Should you put 20% down on a home?
Keep in mind, home values are likely to keep rising year over year. So the longer you wait on a 20% down payment, the higher that down payment amount gets. For many people, then, saving 20% is simply not realistic. Putting 20% down may also be a bad idea if you don’t plan to own the home long. For one, it lowers your rate of return once you sell.
How much is a 20 percent down payment on a home?
A 20 percent down payment on a home at this price would come to $80,740. Regardless of price or loan type, though, keep in mind that the more money you put down upfront, the less you will have to borrow. Borrowing less equates to lower monthly payments, and less interest paid over the life of the loan.
What are the pros and cons of a 20% down payment?
But before making a decision one way or the other, consider the pros and cons of a 20% down payment. There are several advantages to opting for a 20% down payment. “Your monthly payment decreases because you’re borrowing a smaller amount from the bank,” says Brett Ringelheim, licensed real estate salesperson at Compass in New York.
Should I get a 20% down payment?
Aiming for a 20% down payment has long been considered a wise financial move. Here are some advantages: 1. You can avoid private mortgage insurance Most lenders require that you purchase private mortgage insurance (PMI) if your down payment is less than 20%.
Should you put down 20 percent on a home purchase?
If you put down at least 20 percent on your home purchase, you’ll see several benefits: Saving money: “With a larger down payment, your monthly mortgage payment will be lower, and you may qualify for better rates or terms,” says Diane Hughes, executive vice president and director of mortgage lending at UMB Bank in Kansas City, Missouri.