Advantages and disadvantages of a 20% deposit (Podcast)


Do you need 20% down payment to buy a home?

According to mortgage consultant Ivan Simental, this is one of the most common questions asked by first-time homebuyers.

“Twenty percent is a large down payment and can at times seem unrealistic and intimidating,” Simental said on a recent episode of The Mortgage Reports Podcast. “If you’re trying to save a 20% down payment it can be a little scary sometimes. “

Fortunately, 20% down is not always necessary. These days, many home buyers can qualify with as little as 5, 3, or even 0% down.

Simental says it’s important to weigh the pros and cons of a big down payment before you put everything on the line. Here’s what to consider before you buy.

Check your eligibility for a low down payment mortgage (August 3, 2021)

Listen to Ivan on the Mortgage Reports Podcast!

Is it better to put 20% less?

The correct size of the deposit is personal. It depends on your home buying goals, personal finances, and the local real estate market where you want to buy.

While you might think it’s always better to put more money aside, it doesn’t necessarily have to be. There are both advantages and disadvantages of making a 20% deposit.

Benefits of 20% down Disadvantages of 20% drop
Less monthly mortgage payments It can take years to save 20% as house prices rise
Lower mortgage rates Drains your savings for emergencies, home repairs, etc.
Avoid mortgage insurance More risk if home values ​​fall

Yes, putting 20% ​​down payment reduces the cost of buying your home. Borrowers who can make a large down payment will save a lot over the life of their mortgage.

But a smaller down payment allows many first-time buyers to access the housing ladder earlier. They can start building equity in their home and reap the benefits of homeownership without waiting years to save 20%.

Let’s take a closer look at each of these pros and cons.

Advantages of a 20% deposit

Lower monthly mortgage payments are the biggest benefit of a 20% down payment.

When you make a larger down payment, you have a smaller loan amount. This means a lower monthly payment and less mortgage interest paid over the long term.

Let’s look at an example:

  • Suppose you buy a house for $ 200,000 with a 30 year loan at an interest rate of 3%
  • If you were to put down a 20% deposit, your payment would only be $ 675 per month
  • With a 5% down payment, your monthly payment would increase to $ 800, or $ 125 more per month

Another advantage is that higher down payments generally mean lower mortgage interest rates.

The less money a homeowner borrows, the less risky their loan is to a mortgage lender. Lenders reward this lower risk with a lower rate and lower long-term borrowing costs.

Finally, a 20% down payment allows you to avoid mortgage insurance.

On conventional home loans, private mortgage insurance (PMI) costs around $ 30 to $ 70 per month, according to Freddie Mac. This can add up considerably over time.

Other low down payment mortgages, such as the FHA and USDA programs, require mortgage insurance regardless of the size of the down payment. Only VA loan borrowers are exempt from monthly mortgage insurance payments.

By putting at least 20% on a conventional loan, homebuyers can avoid this additional cost and save thousands of dollars over the life of the loan.

Check your eligibility to buy a home (August 3, 2021)

Disadvantages of a 20% deposit

The biggest downside to a large down payment is that it reduces your savings and the funds you have left for potential emergencies.

As Simental says, “If that 20% is all of your savings and you run out of money for emergencies or that six-month pillow that a lot of people will tell you you should have in case of an emergency. emergency funds, I strongly urge you not to put 20% less.

Another big downside is that saving a 20% down payment can take years.

  • Say you want to buy a house for $ 300,000
  • 20% down payment requires $ 60,000 in cash
  • If you save $ 500 per month, it will take you 120 months to save $ 60,000
  • It’s 10 years to save 20% down payment!

Keep in mind that home values ​​are likely to continue to increase year over year. So the longer you wait for a 20% down payment, the higher the down payment amount.

For many people, then, saving 20% ​​is just not realistic.

Putting a 20% down payment can also be a bad idea if you don’t plan on owning the home for long. On the one hand, it lowers your rate of return once you sell. On top of that, it puts more of your money at risk if your home’s value drops.

Low down payment loan options

Fortunately, a 20% deposit isn’t your only option.

There are many loan programs that allow much lower down payments. And as long as you can afford the monthly payment (and potential mortgage insurance) on these loans, they might be a good choice for you.

Here’s how the down payment requirements are broken down by loan program:

  • FHA loans: Backed by the Federal Housing Administration, these loans require a minimum down payment of 3.5% if you have a credit score of 580 or higher, and 10% if your score is 500 to 579. These loans require both a monthly and initial mortgage insurance premium (MIP)
  • USDA Loans: These are loans intended for use in certain rural and suburban areas. If you are purchasing a property in an eligible area, you will not need any down payment. Credit score requirements typically start at 640
  • AV loans: VA loans are mortgages guaranteed by the Department of Veterans Affairs. If you are a veteran or military, you may be eligible for this type of loan. Like USDA loans, they don’t require a down payment
  • Conventional loans: Conventional mortgage down payments do not exceed 3% of the purchase price. It’s just $ 6,000 on a $ 200,000 house. The Fannie Mae HomeReady Loan, Freddie Mac Home Possible Loan, and Conventional 97 all only allow 3% down payment
  • Jumbo loans: Jumbo loans are required if you exceed the compliant loan limit ($[currrent_loan_limits] in most parts of the United States). While many jumbo loans require a 20% down payment, some lenders are offering them today with as little as 10% or even 5% decrease

Another option? Explore the down payment assistance programs in your local housing market.

Down Payment Assistance (PAD) may offer grants or loans to help cover your down payment and / or closing costs. These programs are typically offered by state and local governments as well as non-profit organizations.

Eligibility requirements vary, so check with your loan officer or real estate agent for DPA programs in your area.

The bottom line

Don’t let the thought of a big down payment scare you off when buying a home.

“If you’re stuck on ‘Hey I need that 20% down payment because that’s what I was taught – that’s what I grew up thinking’ then take it out out of your head, ”Simental said.

“You no longer need a 20% down payment to buy a house.

If you are wondering what down payment to make, contact a qualified mortgage loan officer. They can advise you on all of your loan options, as well as the costs that go with them.

Check your new rate (August 3, 2021)


About Matthew R. Dailey

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