Is 20% Down the Best Option? Here are some things to Consider
For years, the "gold standard" in home buying has been putting 20% down. This is because it allows you to avoid paying for private mortgage insurance and results in a smaller loan amount with lower monthly payments, which can ultimately save you money in the long run. However, with home prices skyrocketing in recent years, not everyone can afford to put down such a significant amount of money. This begs the question: what are the pros and cons of putting 20% down on your next home purchase? Let's take a closer look
The Financial Advantages of Making a 20% Down Payment
Firstly, let's consider the financial benefits of putting 20% down on your home purchase. Generally, if you have the means, it is wise to contribute as much as possible toward your down payment. This strategy can help you avoid paying private mortgage insurance (PMI), which can increase your monthly payments by hundreds or even thousands of dollars annually. Moreover, with a larger down payment, your loan amount will be lower, which may result in more favorable rates and terms. Ultimately, this approach can decrease your overall loan balance, leading to considerable savings in interest expenses throughout the loan term.
The Disadvantages of Making a 20% Down Payment
Naturally, there are some drawbacks to putting down 20% as well. For one thing, not everyone can easily come up with such a substantial amount upfront. Depositing such a large sum could leave some buyers financially constrained afterward with little or no money left for home repairs, furnishings, or unexpected expenses that come with owning a home.
Furthermore, if you're looking to purchase an older home that requires immediate repairs or upgrades (or even in the near future), it's always beneficial to have extra cash on hand, even if it means taking out PMI and slightly increasing your loan balance to do so.
Ultimately, whether or not putting down 20% is the right move for you depends entirely on your unique financial situation and personal circumstances. If you have enough saved up where a larger down payment won't leave you feeling financially strained afterward, then it could be a smart choice. However, if putting down 20% would drain your bank account, then going with less than 20% might make more sense financially.
Alternative Ways to Reduce Your Monthly Mortgage Payment and Put Less Money Down
If you cannot afford to put down 20% on your home purchase, there are still options to reduce your mortgage payment. One way is to buy points on the interest rate, which essentially means paying upfront to lower your interest rate over the life of the loan. This can save you money in the long run, but it requires a larger upfront payment. Another option is to pay a one-time upfront mortgage insurance premium to eliminate the need for private mortgage insurance (PMI), which can add hundreds or even thousands of dollars to your monthly payments each year. This can be a good option if you don't have the funds for a larger down payment but want to avoid PMI. However, it's important to carefully consider the cost-benefit analysis of these options and speak with a mortgage professional to determine the best approach for your financial situation.
* Please note that loan program availability and requirements may vary depending on your specific circumstances. If you would like to explore your financing options and discuss your unique scenario, please consider scheduling a consultation with me.
