Pros and Cons of a 20% Down Payment

by | Mar 16, 2021 | Buying A Home | 0 comments

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:

  1. 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.
  2. 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.
  3. 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. 
  4. 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. 

  1. 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.
  2. 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. 
  3. 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!