While a 20% down payment used to be the norm, now most lenders allow buyers to purchase a home with a much lower down payment – as low as 3% – 5%.
Even with low down payment options, many consider 20% to be the ‘golden rule’ of purchasing a home. Your personal situation will help determine what size down payment is best.
Keep reading to learn to pros and cons of a larger down payment.
Pros of 20% Down Payment
A large down payment is a rule of thumb for a reason. If you can afford it, here are the pros to 20% down:
- You’ll pay less in the long run. The less amount of money you borrow as a loan, the less you have to pay back with interest. Putting down 20% at closing means you’ll pay interest on 80% of the purchase price of the home, compared to 95% with a 5% down payment.
- Lower interest rates. Not only will you have a smaller loan to pay back but a larger down payment can lead to a lower interest rate. Lenders see a larger down payment as a sign that you are not a credit risk.
- Your offer will stand out. In a competitive market, the more cash, the better. Sellers gain confidence when a buyer is able to put down a larger amount.
- No PMI. Private Mortgage Insurance (PMI) is an insurance policy that protects the lender if you are unable to pay your mortgage. If you put down less than 20%, PMI is added, increasing your monthly mortgage payment.
Cons of 20% Down Payment
While a larger down payment can be beneficial, there are some disadvantages as well.
- It takes longer to save. Many first-time homebuyers find it takes years to save 5% for a down payment. Saving 20% takes substantially longer. This can keep you renting for an extended period of time rather than building equity as a homeowner.
- You’ll have less cash after closing. If you spend all of your savings on a down payment, you’ll have less left over for furnishing, decorating, and making updates to the home.
- The benefits won’t add up if you move. The benefits of 20% down are long-term benefits, which means you need to stay in the home for a long time. If you plan on moving, it might not make sense to put extra money down.
Strong offers stand out in today’s competitive market, and a larger down payment can make a difference to some sellers. However, with strong credit and a good loan, you’ll still be able to make offers with a smaller down payment.
If you aren’t sure how much you should put down, speak with your mortgage lender and real estate agent about your options!