Why 20% Down is Not Necessary But Preferred
BY NANCY BIERENGA, REALTOR®, E-PRO, ABR, éLAN REALTY, PAST PRESIDENT, WEST MICHIGAN LAKESHORE ASSOCIATION OF REALTORS
If you are thinking about buying a home this year, you may be confused about how much money you need to come up with for your down payment. Many people you talk to will tell you that you need to save 20% or you won’t be able to secure a mortgage.
The truth is that there are many programs available that let you put down as little as 3%. Veterans, for instance, could qualify for a Veterans Affairs Home Loan (VA) that requires no down payment at all. There are also government-backed loans (such as FHA) that require only 3% down.
These programs have cut the savings time that many families would need to compile a large down payment from five or more years down to a year or two. This allows them to start building family wealth sooner.
So then, why do so many people believe that they need a 20% down payment to buy a home? There has to be a reason! Let’s look at the four main reasons why putting 20% down is a good plan, if you can afford it.
1. Your interest rate will be lower. Paying a 20% down payment vs. a 3% to 5% down payment shows your lender/bank that you are more financially stable, thus a good credit risk. The more confident your bank is in your credit score and your ability to repay your loan, the lower the rate they will be willing to give you.
2. You’ll end up paying less for your home. The bigger your down payment, the lower your loan amount will be for your mortgage. If you are able to pay 20% of the cost of your new home at the start of the transaction, you will only pay interest on the remaining 80%. If you put down a 5% down payment, the extra 15% on your loan will accrue interest and end up costing you more in the long run.
3. Your offer will stand out in a competitive market. In a market where many buyers are competing for the same home, sellers like to see offers with 20% or larger down payments. The seller gains the same confidence that the bank did above. You are seen as a stronger buyer whose financing is more likely to be approved. There is less question about whether you will be able to purchase the home and they will be able to move on.
4. You won’t have to pay Private Mortgage Insurance (PMI). PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conventional loans that have down payments less than 20%.
When you put down less than 20% to buy a home, your lender/bank will see your loan as having more risk. PMI helps them recover their investment in you if you are unable to pay your loan. This insurance is not required if you are able to put down 20% or more.
Many times, home sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their house to put down 20% on their next home.
If you are looking to buy your first home, you will have to weigh the benefits of saving a 20% down payment vs. the time and cost of continuing to rent while you save that amount.
Bottom Line. If your plan for your future includes buying a home and you’re already saving for your down payment, you should plan to talk with a mortgage lender soon to figure out what type of loan makes the most sense for you. Your lender will also make a “Good Faith” estimate for you of all the costs and payment information you’ll need in order to purchase.
It’s important to have a good relationship with a lender so you have someone with financial experience of whom you can ask questions until you thoroughly understand the process.
Nancy Bierenga, of élan Realty, is past president of the West Michigan Lakeshore Association of REALTORS®, a member of the National, Michigan, and West Michigan Lakeshore Associations of REALTORS®, and the Greater Muskegon Woman's Club. She is an Accredited Buyer's Representative, a Certified e-Pro REALTOR®, and a Certified Fair Housing REALTOR®. She and husband Robert have lived in Muskegon since 1996. Phone Nancy at (231) 730-0887, email Nancy@HousesByNancy.com, stop by élan Realty's office at 4075 Airline Rd., Muskegon or visit the élan Realty on Facebook here.
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