Why You Shouldn’t Put Less Than 20% Down On Your House

You have chosen the most ideal home and now ready to purchase. Your credit is great and you know you will not have any troubles getting approved for loans. However, you do not have enough for a 20 percent down. But, should it be something that you must worry about? Well, not really. In spite of what your mortgage lender made you believe, making smaller down payment can be a smart move sometimes.

Why 20% Down is Considered as a Gold Standard?

Mortgage lenders love big down payments since it reduces the risk for them. Once you put 20% down, they are lending you lesser money, so once you fail to pay back what you really own, the blow will not be as severe as it’d be if you would put 5% down only.

If you can pay 20 percent up front, you will likely get approved and you will score better interest rates. Smaller borrowed amount and low interest rates can shave thousands of dollars off your loan. Anytime you put less than 20% down on your preferred home, you will need to pay PMI or private mortgage insurance until you reach 20 percent equity. PMI may differ anywhere from 0.3%-1.5% of the original amount of the loan, depending on the size of your down and your credit score.

If you do not like to pay too much money in PMI and interest, it only makes sense to put down a 20% down if you could afford to so. However, there are times when it is wiser to hold on to your money, even though it means high mortgage payments.

When Not to Put 20% Down?

The primary benefit of not putting 20 percent down is that you freeing up your money to be used to some things. If you are purchasing fixer-upper, for instance, creating small down payment allows you to use that money for renovations and repairs to your house. After that, if you decide you would like to eliminate your PMI down the road, you could refinance. If upgrades increase the home’s value, you will get equity without the need to put more money down.

You might also like to keep your cash liquid so you could put your money to some things like for your retirement savings. It’s only a great idea if you could afford the mortgage payment with PMI of your home. If that is straining your budget, you are better off putting your money toward a down payment on your house. This way, your payments monthly will be much lower and it’ll be much simpler to stay on the top.

Another time to stick with low down payment is when homes in your place are appreciating rapidly. If it is the case, you will build equity without the need to do anything, so there is less incentive to put lots of cash down if you purchase the property.

A 20% down makes a lot of sense for several homebuyers, yet not as much for some people. Consider the money you can afford to put down on a property and how that would impact your payments monthly.