Do You Need a 20% Downpayment?
The myth of the 20% down payment is a fallacy we have tried to debunk in the past. You do NOT need a 20% down payment to qualify for most conventional mortgages, as long as you have sufficient income and good credit. Some government programs, such as FHA and VA, will work with very low down payments, from 0-3%. So don’t fret if you don’t have 20% saved up…you can still buy a great home.
However, we would be remiss if we didn’t discuss the fact that there are certain advantages to making a larger down payment, if you are able to.
Bigger down payments can often secure lower interest rates.
A bigger down payment is often a sign of financial security. If your bank is confident that you will repay your loan, as evidenced by your income, credit, and the size of our down payment, then their risk is lower. For lower risk clients, they will often offer the best interest rates.
You will save money in the long run.
Paying a larger down payment, such as 20%, means you pay interest on a lower balance – in this case 80% of the purchase price. If you only put 3% down, then you are accumulating interest on 97% of the purchase price. This interest raises your cost over the life of the loan exponentially.
Sellers may be more willing to work with you.
If you have a larger down payment, sellers make take that as a signal that you will be more successful securing financing and closing the deal than someone who is paying a smaller down payment. In a situation where there are multiple offers on the table, your larger down payment may stand out and look like a more attractive option.
You will avoid paying Private Mortgage Insurance (PMI)
Private mortgage insurance doesn’t protect you. It protects the bank. For borrowers who are making smaller down payments, the bank wants insurance to ensure that they can recoup some of their costs if you default on the loan. However, once you reach 20% ownership in your home (either through the down payment, appreciation of value, or a combination of both), then you become less of risk. So a 20% down payment will not typically require PMI. Since PMI is a fee that is added on to your monthly mortgage payment, you will lower your monthly payment and avoid this fee by making a larger down payment.
While there are certain advantages to making a large down payment, you should also consult a financial advisor to see if it makes sense to do so. If you have the cash, could you make more putting that cash to work with other investments, rather than tying it up in your home? You definitely don’t want to have all your wealth tied up in one asset if you can avoid it. With today’s low interest rates, you may make more in a diversified portfolio than you will pay in interest.
Also, if you are currently renting and saving for a down payment, you need to weigh what you will spend on rent for the next few years if you continue to save toward 20% down, versus buying now with a smaller down payment. Since home values increase, as does rent, you will likely pay more for your home in a few years. Making smaller down payment will help you get out of the rent cycle faster and on your way to building equity in your home.
There is no right answer for everyone. Each situation is unique, and you need to weigh all the factors. Seek advice if you are unsure – a financial planner, tax advisor, real estate attorney, or mortgage lender can provide you with valuable information to make your decision.
Deciding to buy a home is one of the biggest decisions you will make. If you need a referral to a high quality advisor, we can help with that! Whether you are buying or selling in Fountain Hills, Susan Pellegrini and Karen DeGeorge are ready to put their care and expertise to work for you. Buying or selling, our first-class service comes with a wealth of experience and eye for detail, ready to focus on you. Visit our website to learn more and contact us or give us a call at (480)- 315-1575, we’re here for you.