Should You Put Down 20% on Your Home Purchase? Look at These Reasons

• Author: Jacob Greene
• Posted: 2023-12-05

Many prospective home buyers erroneously believe that they need to put down 20% on a house in order to obtain a mortgage. However, many lenders and available programs make it easier to get into that dream house without having a large outlay of cash on hand. Even though it is possible to qualify for a mortgage without a 20% down payment, most financial experts recommend striving for this goal.

Here are just a handful of the advantages that you will see if you are able to put down this type of money on your home purchase.

Lower Interest Rate

One of the best ways to make the most out of your home investment is to secure as low an interest rate as possible. The lower the interest rate attached to your mortgage, the less money you will pay over the lifetime of the loan. Savvy financial experts know that by putting more money down on your loan, you are showing that you enjoy financial security. This translates into potential lenders believing that you are not as high of a financial risk.

As a result, you will likely see this security play out in the form of a lower interest rate. Even the slightest savings on your interest rate could save you thousands of dollars in the long term. This is why it is imperative to do everything that you can to secure the lowest possible interest rate.

Pay Less Overall

You do not need a fancy mathematics degree to understand that you will pay less each month if you put more money down initially. Keep in mind that you will not pay interest on the amount that you put down on the home. If you put 20% down, you are only going to pay interest on the remaining 80% balance of the loan. However, if you are only able to put down 5%, you are going to be on the hook for paying interest on 95% of the loan. You can see how this will add up over time in a significant way.

Smaller Loan Amount

Putting down a big down payment means that you will also have a smaller mortgage balance on your hands. This offers greater protection if the market happens to decline because you will naturally be sitting on more equity. You never know where your finances will take you. Committing to putting 20% down will put you in a more secure position when it comes to selling or refinancing your house in the future.

Present a More Competitive Offer

Today's housing market is hotter than ever, necessitating that prospective buyers do everything that they can to position themselves with a competitive offer. Home sellers that see a potential buyer that is able to offer 20% down will be more likely to accept this offer. Because so many homes are going for over asking prices in some markets, it is always a good idea to make yourself stand out from the crowd.

Greater Flexibility

It makes sense that you will have greater flexibility with your loan options if you are able to put more money down. Loans such as the conforming limit options generally require at least 20% down. In addition, the majority of the adjustable-rate mortgages (ARM) do not begin to provide the lowest interest rates unless you are able to offer 20% down. You will open up your loan options if you have this cash ready to invest.

Avoid Paying Private Mortgage Insurance (PMI)

PMI gives protection to the lender in case the buyer is not able to meet the terms of the loan. Most lenders roll this insurance into the monthly mortgage payment if you are not able to put at least 20% down on the home. While the PMI fee can be canceled once you reach 20% equity in the house, you can avoid these costly fees altogether if you start with that amount of down payment.

For most families, your home is the greatest financial investment that you will ever make. You can maximize this investment by putting down the most money that you can afford. Your mortgage lender will be able to walk you through all of the different scenarios to figure out the best option for your personal financial needs.