The Benefits of a 20% Down Payment on a Home

If you’re considering buying a home, you should already be saving your money. There are lots of loan programs and money lenders out there who will promise you easy fixes, like only putting 3 percent down or loaning you money on high interest rates. Most of the options that you have, aside from putting 20% down on a home, are a bad idea that are going to leave you wondering how you’re going to pay the high payments every month. Let’s take a look at why putting 20% down is your best option when buying a home.

Banks and Mortgages:

Ever since the real estate crash in 2008, banks have been smarter about who they give a mortgage to. If you do not have 20% of the cost of the home you want to buy saved, you better believe that most banks are not going to give you a mortgage. There are some banks who will still lend you the money for your home without 20%, but we’re going to go through how you can get these loans, and you’ll see why we do not recommend going with these routes.

Common Alternatives to Avoid:

Even if you do meet the qualifications for such alternatives, we do not necessarily recommend going through with these programs because of the interest rates and high costs that come along with them.

Since you want to know more about these alternatives, let’s go over what is out there:

PMI:

Private mortgage insurance is usually required by lenders who ask homebuyers to provide more coverage if they cannot afford to put down 20% towards their down payment. PMI is extra insurance for lenders to cover the transaction, which adds more payments coming out of your pocket. There is also government-based insurance out there quite similar to PMI that you can also take out if you cannot put 20% down on a home. It’s best to avoid having to pay for a PMI since both PMI and governmental insurances costs make a big difference in monthly payments.

Home Equity Loans:

A home equity loan seems like an easy escape from having to save 20% for your down payment. However, even if you do have a good enough credit score to qualify, it’s best if you stay away from a home equity loan. The negative effect of a home equity loan is not being able to pay the interest that comes along with the loan. So if you take out a home equity loan, and you cannot afford the payments, the risk is on you from your lender, and you can lose your home if you do not pay on time.

FHA Loans:

FHA loans are government-insured loans that protect the lenders if the borrower, or homeowner, cannot make the payments on the loans. These loans may seem attractive if you can only afford 3-5 percent to put on a down payment, but if you can avoid them, you should. With an FHA loan, you also have to pay mortgage insurance premiums (MIPs), which both are paid monthly and annually. These fees add to the cost of your mortgage, and you also have to pay monthly. So you will be paying even more interest!

Choices You Should Make:

With all of the interest rates, fees, insurance costs, and other risks that come along with not paying the 20% down payment, there doesn’t seem like there are many alternatives out there. Since paying 20% on the down payment is a much better option to go with, let’s take a look at the benefits.

Equity building:

Once you pay the 20% down payment, you’re building equity in your home. This increases your personal value and helps protect against economic tides. This ensures that you will have a place to live even if the housing market takes an unexpected turn.

No PMI:

If you save 20% for a down payment, you will not have to pay for private mortgage insurance. That’s right: no PMI payments! This frees up money that you can spend on renovations, your family, and other necessary payments, like school loans or car payments instead of paying another payment towards the cost of your home.

A Smaller Mortgage Means a Smaller Payment:

Pretty obvious, but a smaller home mortgage you have means a smaller monthly payment for you. Let’s say that you want to buy a home that costs $200,000. 20% of 200,000 is $40,000. There is no way around it—$40,000 is a lot of money. However, if you manage to save over time, you will be able to reach your goal of $40,000 even if it takes you a few years to get there. In the long run, it is better to have saved enough money to put down than owe tons of interest on your home for many, many years. The lower your interest rate is, the lower you will save over the life of your loan and on the interest you have to pay on the loan. That means thousands of dollars you keep in your pocket!

If you do not believe you can save money for rent due to the monthly income you have no being enough, you are wrong. Do not doubt your capabilities to save money, or you will never move into your dream home. If you’re only thinking about money that you make from your job, check out these other ways to save up for your down payment. Even if saving up the 20% for the down payment takes years, it is completely worth doing to ensure that you can attain, and keep, that dream home you’ve always wanted.

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