Many first-time homebuyers believe the myth that you need at least 20 percent saved to buy property. While 20 percent is ideal for various reasons, homebuyers can get a mortgage with a lower down payment under certain conditions. What should you know?
History of the 20% Down Payment
Mortgage lenders assume a degree of risk by expecting homebuyers to make their monthly installments. To decrease this risk, many require a down payment. Twenty percent remained the standard for mortgage approval until 1956, when lenders started to require private mortgage insurance (PMI) for less paid upfront. Private mortgage insurance serves as financial support for the lender, in the event a homebuyer defaults on their loan.
Today, 20 percent can seem impossible for some buyers. To determine how much they can afford, buyers are encouraged to consider the total cost of homeownership. Along with 20 percent down, your budget should include moving and closing costs, the inspection, appraisal, homeowner’s insurance, HOA fees and any repairs.
Why You Should Aim for 20%
Putting down 20 percent on a home offers several advantages, including:
- It decreases the overall amount that you’ll need to pay back, including interest.
- You won’t have to pay PMI, resulting in additional savings.
- If you pose less of a risk to lenders, they tend to offer lower interest rates.
- You build immediate equity in your home.
- Paying more upfront gives you an advantage over other borrowers.
- Lower mortgage payments can result in a lower debt-to-income ratio.
Reasons Not to Make a 20% Down Payment
Considering all factors, 20 percent is not for everyone. Consider a lower down payment if:
- You intend to make repairs and will be putting your budget toward these funds.
- You would like to purchase a home sooner rather than continue paying rent.
- You anticipate being house poor after making a 20 percent down payment.
- You strongly expect the property to appreciate.
Believe it or not, more buyers go in this direction. The typical homebuyer puts 14 percent down and this amount decreases to eight percent for those under age 32.
Are you shopping around for a mortgage? Explore financing options through Ion Bank!