If you’re thinking about buying a home, you want to put down 20%, but do you really want it? And if you have the option to pay less, should you still pay 20% or is there some other amount that would be more productive for the down payment?
“Contrary to popular belief, it’s a myth that you have to make a 20% down payment to buy a home,” says Ashley Moore, network lending manager at Chase Home Lending. In fact, he tells me, some home loans possibly require a much smaller down payment (between 3% and 5%) and the industry average is between 6% and 8%, with a median of 14% in 2023.
Debra Shultz, vice president of lending at CrossCountry Mortgage, said the alleged 20% down payment requirement across the board is a misconception. There are many loan products on the market that are designed for first-time homebuyers and for existing homebuyers who have a minimum of “It’s 0% for VA, 3% for conventional, 3. 5% for FHA, 5% for jumbo, et cetera. “
To be clear, some lenders would possibly require a 20% down payment. Moore says not all credit products are created equal, and some have stricter rules than others. “Choosing the right loan for you is primarily based on your monetary health: your income, credit history and score, employment, and money goals,” she adds.
However, Moore recommends paying more than 20% if any of the following conditions apply:
If you don’t have to pay a 20% deposit, you can automatically say you won’t. In fact, I recently reported that buyers are getting artsy when it comes to locating a home, and one of the adjustments they’re making is putting less than 20% off. But before you make a decision one way or the other, think about the pros and cons of a 20% down payment.
There are several benefits to opting for a 20% down payment. “Your monthly payment goes down because you borrow less from the bank,” says Brett Ringelheim, Compass’ licensed real estate salesperson in New York City. “And this relief in borrowing budget can lead to a more favorable interest rate, depending on the terms of the loan,” he explains.
And the importance of a more favorable interest rate cannot be underestimated. “Some lenders offer a lower rate for a higher down payment, which would yield a lower monthly payment and less interest paid over the life of the loan,” Shultz says. Currently, it takes an average of 13.5 years to break even on a mortgage, and this is one way to do so faster.
Putting 20% down can also help you to avoid paying private mortgage insurance. “There can be exceptions or ways to avoid PMI, but it is typically required — and if you’re refinancing to a conventional loan, PMI may be required as well,” Moore says. PMI is designed to protect the lender in the event you default on the loan. While it’s usually paid in monthly payments, Moore says you can choose to pay the entire amount upfront, depending on your lender and insurance company. “PMI typically amounts to about 0.5% to 1% of the loan, and you can usually request to have PMI removed once your outstanding balance reaches 80% of the original loan amount,” she adds.
Melissa Cohn is the regional vice president of William Raveis Mortgage and as a general rule, she recommends a 20% down payment because the more you put down, the higher your rate will be, in addition to avoiding PMI. Budget to make a larger down payment and not leave you out of pocket after closing, it’s a smart concept to make a down payment of 20% or more,” she tells me.
A 20% down payment can also be beneficial in another way. “A larger down payment creates immediate equity in the home — and this provides a shield to weather fluctuations in home values,” Shultz says.
And this equity is useful for a variety of reasons. If you don’t make a 20% down payment, but your life changes in five years or less and you then want to sell or refinance the home, Moore warns that you may not have enough equity in the home to make a profit or even pay it all off. of the prices involved in the sale. ” In other words, when you deposit more money, you have a greater margin of protection to deal with market fluctuations and their effect on the price of your home. ,” she says.
And there’s another reason why you might want to consider a 20% down payment. “When there is more than one interested purchaser for a particular property, putting down 20% (or even more) typically signals seriousness of purpose to the seller and might help to reduce appraisal risks,” says broker Andrea Saturno-Sanjana of Coldwell Banker Warburg in New York.
Despite all the benefits of a 20% down payment, there are also some drawbacks before making a decision. That’s a significant upfront cost, and Ringelheim says it may take several years to save that kind of money.
In the meantime, delay home ownership. “Saving 20% can be time-consuming, which can cause the customer to pay more for an asset in the long term when they may have purchased it earlier at a lower price,” Shultz says. Plus, if you hire, he says, the rental payment period is extended, which benefits the landlord, not you.
And regardless of the value of the home, 20% is not a negligible amount of money. “Separating the 20% can be tricky for first-time homebuyers or repeat buyers with limited savings,” says Shultz. She explains that this can tie saving money that you can set aside in case of bad weather or unforeseen expenses. In fact, homeowners pay about $15,000 a year in hidden fees, according to a study by Zillow and Thumbtack. “The only way to withdraw equity in real estate is to refinance and withdraw money, or take out a line of credit or home equity loan,” Shultz adds. But he warns that doing so can expose you to a higher interest rate and increase your monthly payment.
And Cohn adds that there are costs involved with getting a home equity loan, assuming you have enough equity to tap into.
You may also be purchasing a home that needs some repair work or updates. However, Ringelheim says, “The high upfront cost may cause you to postpone renovations after purchase so you can begin to rebuild your savings.”
It’s also important to consider the other opportunity costs of a 20% down payment. “Part of the money used to reach a 20% down payment could have been invested in an asset that yields a higher rate of return than your mortgage rate over time,” explains Shultz.
Agent Alana Lindsay of Coldwell Banker Warburg in New York City, agrees. “If you are using up a full 20% of the purchase price of a home as the down payment, you now then take away the opportunity to use that money in other areas of your life,” she says. “You could put that in a brokerage account, buy into a business, or even go on vacation.” Lindsay adds that people close to retirement, in particular, might want to think about strengthening their brokerage account. Ultimately, she says it’s up to the buyer to decide, but advises readers to consider where they are in life, and what opportunity costs they might be missing out on.
After going over the pros and cons, those experts have some important issues to highlight. Cohn recommends a down payment you’re comfortable with. “It’s having some cash in the bank after the last minute and not being tied to the equity of “Making smart plans would consist of making sure you have 12 months of all your bank expenses for rainy days. “
Moore agrees, adding that you should not give up all of your savings to buy a house. “You should set money aside for unexpected circumstances or hardships that could come up, and if you don’t have enough savings, it isn’t advisable to put 20% down.”
Buying a home comes with other expenses, such as the latest appraisal prices, inspections, and more. These can be up to 3% or more of the final purchase price, and while there’s no way for a customer to pay those fees altogether, there are tactics for homeowners to save on them, such as local landlords and down payments. Payment assistance systems and even lender-backed resources,” Moore says. So be sure to do your research, as not understanding all the features is a not unusual mistake when home customers for the first time.
And if you’re still undecided, Shultz offers two chances to consider. “Deposit less upfront, but make sure your lender allows for relief in principal with a redesign of the monthly principal and interest payment based on the new balance,” he says. “That way, you can reduce your principal balance and gain more equity when you’re more comfortable with the budget. “
Another option is to carry it on your back. So how does this concept work?”Borrow 80% as a first loan to avoid paying PMI, and 10% to 15% as a line of credit or home equity loan to make up the difference,” says Shultz. “Paying on the spot or in full when integrated with that budget is more convenient, as it’s a popular strategy for homebuyers earning additional income,” he adds. However, make sure you understand this procedure and your lender’s terms.