You’ve probably heard that it’s ideal to put down 20% or more on a home when you choose to buy. This is because initially putting more down on a home carries with it a great many advantages in terms of finances and home ownership. Here is a look at why 20% in particular is a number that many home mortgage experts recommend for a down payment on a new home.
You’re more likely to have your loan approved.
Of course, one major reason to aim for 20% is to increase your chances of having your loan approved. Lenders like to see home buyers put down 20% because it simply means less risk for them.
You won’t pay mortgage insurance.
This is one advantage to a 20% down payment that many home buyers don’t consider initially. As we discussed in our recent article about mortgage insurance, mortgage insurance is an insurance policy that will offset losses to the lender if the buyer is not able to repay the mortgage for any reason. Lenders typically require it for any mortgage where the down payment is less than 20%, at least until your loan’s loan-to-value (LTV) ratio reaches 78 to 80%. Mortgage insurance can cost anywhere from $55 to $125 per month per $100,000 financed, and it’s something you’ll be paying as part of your mortgage payment along with principal, interest, taxes, and homeowners insurance; so it’s nice to eliminate the need to pay for it if you can.
You’ll have more equity right off the bat.
Another common-sense reason to put 20% down is you’ll have more home equity right off the bat. That makes your down payment a safeguard for you in case the market downturns unexpectedly. It also gives you more flexibility down the road should you decided to refinance or sell.
You can take out a smaller loan.
A larger down payment, of course, also means that you can take out less money on loan in the first place when financing your new home. This means that you’ll have the freedom to choose a shorter loan term and to make smaller monthly payments.
You’ll have a lower interest rate.
The interest rate on loans with a 20% down payment are often lower than those with less money down. This helps contribute to smaller monthly payments, and it also means you’ll be paying less (potentially thousands less) in interest over the life of the loan.