What You Need to Know About Making a 20 Percent Down Payment On A House

• Author: William Asher
• Posted: 2024-03-23

Providing 20 percent of the value of a home is what lenders want you to do, but it's not always affordable for every buyer. The 20 percent down payment is one many people forget about when they're buying a home, and it's one many people don't even bother with considering all the options available for homeowners these days. From low to no-down payment assistance programs to first-time homebuyer assistance programs and even 100 percent financing, it's possible to find a home without a down payment. However, it's not something you should do until you realize the consequences of buying a home without putting money down. Here's what you should know about the 20 percent down payment.

Skip the Down Payment, Pay More Money

Lenders want to know you are a responsible borrower with the financial means to purchase a home. It's risky for a lender to give you the money to pay for an entire house and just hope you're going to pay it back. They want to know you have enough money to put down on the home so you're not upside down from the start. They want their borrowers to have equity in case they need to turn around and sell the home themselves if the borrower defaults on their loan.

Most traditional lenders won't provide you with an affordable mortgage without at least 20 percent down. You're going to pay something called Private Mortgage Insurance (PMI) which can significantly increase the cost of your mortgage. Most people pay approximately .75 to 1 percent of the value of their home as a PMI payment on top of their mortgage. If you have a $300,000 home and finance 100 percent of the home, you might pay as much as $3,000 per year, which is an additional $250 per month. Can you afford to pay for a mortgage and an additional $250 per month until you owe less than 80 percent of the value of your home? You could spend years and tens of thousands of dollars on PMI if you don't make a down payment.

Making a Down Payment Might Give You A Better Chance at Buying A Home

The market is tight in many communities, and that leaves buyers making offers alongside other buyers. Sellers are finding themselves with multiple offers, and they're far more likely to accept an offer from a buyer with a preapproval letter from a bank, a buyer who is paying all cash, or a buyer with a down payment even if those buyers don't make the highest offers. These buyers come across as more responsible and more likely to go through with the purchase.

Most Buyers Don't Make A Down Payment

There are so many loan options available to buyers that most people aren't using their down payment money on a down payment. If they have down payment money, they're using it for furniture, to pay for upgrades, or for other reasons while they allow financial assistance programs to help them purchase a home without the typical down payment.

Very few buyers actually take advantage of the financial benefits of making a down payment. They get to have instant equity, they get a much lower mortgage rate, and they aren't paying additional money they probably can't afford in addition to their new mortgage. Making a down payment is always preferable and more responsible than not, but only half of all buyers are making down payments anymore.

If you're one of the millions of Americans who feel it's impossible to make a down payment on a home, think again. It's much easier than it sounds. You need only $20,000 for every $100,000 you spend, which can be saved faster than most people realize. Create a budget, put every spare dollar into savings, and look for creative ways you can bring in an additional income to help you save for a down payment. It's better to save for a down payment than it is to pay tens of thousands of dollars to a PMI company to have a loan. You want to be a homeowner, but not at the cost of your financial peace of mind.