The amount of a down payment can be especially important in today’s competitive home buying market. It indicates to both homeowners, sellers and mortgage lenders that a buyer is serious about making a purchase. Generally, the larger the down payment, the stronger the offer.
There are a lot of non-traditional ways to raise cash for your down payment, if you are willing to think outside of the box. See ”How to Save for and/or Acquire a 20% Down Payment.” There are lower down payment programs that allow qualified buyers to put down options as little as 3.5%, but there are at least 10 perks that come with a 20% down payment option.
- You can avoid monthly payments for Private Mortgage Insurance (PMI). If you were to abruptly stop making payments on your home, PMI protects the lender. Typically, if your down payment is less than 20%, lenders require you to carry PMI. These payments are made at least until the loan reaches an 80% loan-to-value (LTV) ratio depending on the type of loan and investor requirements PMI is not the same thing as homeowner’s insurance. It’s a monthly fee rolled into your mortgage payment. For more on PMI, see the Citywide article Mortgage Insurance | Citywide Home Loans.
- Your monthly payments will be lower if you reduce the amount of your loan with that 20% down payment. Check with your real estate agent or lender to determine how much the amount of your monthly payments can be reduced with a larger down payment.
- You can build equity in your home more quickly if less of your monthly payment is going toward interest and more toward the loan’s principal. The amount of your payment and the ratio of interest to principal can depend on the term of your loan and your amortization schedule, but a larger down payment and smaller loan principal give you more payment options.
- Your interest rate may be lower, because a 20% vs. a lower down payment shows your lender you’re more financially stable and not a 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 they are likely to give you.
- Lower interest rates can save you significant amounts of money, monthly and over the life of a mortgage. This means more money in your monthly budget for the other expenses and fun things in of your life.
- You’ll end up paying less for your home. The larger your down payment, the smaller your loan amount will be for your mortgage. If you’re able to pay 20% of the cost of your new home upfront, you’ll only pay interest on the remaining 80%. But if you are paying interest on 95% of the cost of your home, the interest paid on your loan will add up over the lifetime of your home loan and end up costing you more.
- Your offer will stand out in a competitive market. When several buyers are competing for the same home, sellers are more likely to accept offers that come in with 20% or larger down payments. The seller gains the same confidence as the lender. You are seen as a stronger buyer with financing that’s more likely to be approved. Therefore, the deal will be more likely to go through.
- Loan pre-approval can be easier. Being able to afford a large down payment is a sign of borrower stability and shows lenders that you know how to save. Since this is one of the best indicators of creditworthiness, you are more likely to get pre-approved for a mortgage.
- You can be mortgage-free sooner. With more of the costs covered at the beginning, you could be more likely to pay the entire mortgage off in less time. With lower monthly payments, you might even be able to afford to make principal pre-payments. Paying off a mortgage early often makes financial sense and can help you be better prepared for retirement.
- It gives you protection from negative equity. If the value of your home drops below the amount of the principal you paid for it, you could owe more money on your home than you can sell it for. You don’t want this to happen. The more equity you have in your home, the less likely you are to be upside down on your mortgage if home prices go down.
If you can afford a 20% down payment or if it is cost-effective to wait to purchase a home so you can save for one, you may end up paying less for your mortgage overall, paying it off faster and getting better interest rates and terms in the bargain. Talk to your real estate agent or your Citywide loan officer about your down-payment options.