Top Five Reasons To Put A 20% Down Payment On A House

Posted on February 1, 2017

First, we should start by mentioning that yes, you can buy a house with less than 20 percent down. The question is, Is it financially wise? There are some substantial benefits to a large down payment, so be informed and proceed knowing the following facts.

  1. You will avoid private mortgage insurance (PMI). If you buy a house with a down payment under 20 percent, you will pay PMI until the loan-to-value ratio hits 80 percent. According to the Mortgage Bankers Association of America, that fee is typically .5 percent of the loan per year (so $1,500 per year on a $300,000 loan).
  2. You may get better interest rates. U.S. News lays out how a low down payment can be a risky endeavor when purchasing a home and can lead to higher interest rates.  
  3. Your offer will be more attractive. In the event of a bidding war — particularly over a short sale or foreclosure, where the bank gets to choose the bidder — having a “clean” offer is a huge benefit. Being able to provide a large down payment in cash could mean the difference between getting your dream home and continuing your search.
  4. You start off with more equity. Think about it this way: With 20 percent down, you already have a decent amount of equity in your house. If you put only 5 percent down, any downward fluctuation in the real-estate market could put you underwater so that you owe more than the house is worth.
  5. You demonstrate good financial discipline. Home ownership is not always less expensive than renting, and expenses will always pop up. Having the discipline to save up 20 percent of a home’s value shows that you know how to save and can handle budgeting for the unexpected.

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