Recent years have seen a trend in alternative home financing that has allowed many homeowners to buy a new house without a traditional down payment. Some buyers have been able to put down as little as 3 percent thanks to loans with lessened restrictions regarding down payments. Some of this more relaxed lending has occurred in response to an effort to extend home ownership to more people, but it has also seen some backlash in the form of an increased number of homeowners who struggle to meet the terms of their loans.
There are many of reasons that it makes sense to put 20 percent down on your mortgage. Here are just a few:
- Up-front equity. Obviously, putting a substantial amount down on your home gives you an instant advantage in equity. Since most homeowners invest in a home largely because they want to have equity in a stable investment, the more that you can put down, the better. You’ll be able to better weather any downturns in the market and you’ll likely avoid going “underwater” on your investment.
- Better rates. Generally speaking, putting more down on your loan means that you’ll be able to secure a better interest rate. You’re a better risk to your lender because you’ve already proven a degree of financial responsibility by putting up a respectable down payment. You’ll also lower your monthly payment by paying more up front.
- Attractive offer. Sellers like buyers who can offer a certain amount up front. It shows that you can deliver on the sale – and it also gives you leverage in case of a bidding war. In short, your offer will be taken seriously.
- No PMI. Putting 20 percent down on your new home means that you won’t have to pay for PMI (private mortgage insurance) since you are a lesser risk. If you put less than 20 percent down, you will have to pay PMI until you have paid 80% of the value of your loan. Avoiding PMI could save you .5 percent on your loan each year.
- Security. Home ownership always entails risk. You never know when unexpected expenses might occur. If you’ve already invested 20 percent, you’ve likely shown enough that you have the restraint to save money, which can only help you when unforeseen circumstances arise.
- Faster track. It might seem obvious, but if you have 20 percent to put down, you’re going to be in a better position to pay off your mortgage quickly – especially if you take advantage of refinancing options in the future. While the recent real estate market may have been uninspiring, there’s always the possibility that home prices will rise and you’ll be able to either upgrade to a larger home – or refinance to a shorter-term loan.
Putting 20 percent down isn’t possible for everyone, and you shouldn’t be discouraged from home ownership if it’s something that you can’t manage. However, if you’re close to saving enough to put down that 20 percent, it might be a good idea to push for it, because that effort could prove very advantageous.