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.
- 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).
- 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.
- 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.
- 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.
- 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.