One thing many people think of when buying a home is “How much money do I need for a down payment?” Many people may think it’s 20% of the loan to secure a mortgage. There are plenty of options with lower down payment options for qualified buyers who don’t want to put down 20%, It’s important to know how a larger down payment can be a benefit.
Truthfully, there are many programs available that let you borrow money and put down as little as 3.5%, this can be a great benefit for those who don’t want to wait to squirrel away more money for the down payment. Veterans who would like to buy a house may also qualify for a Veterans Affairs Home Loan (VA) and may not need a down payment. These programs have really cut down the savings time for many potential buyers, enabling them to start building family wealth sooner.
However, if you can afford it, here are 4 great reasons a larger down payment can benefit you.
1. Lower interest rates
Lenders prefer buyers who are not a large credit risk and having a 20% down payment vs. a 3.5% down payment shows your lender you’re more financially stable. This allows your lender to have more confidence in your credit score and your ability to pay your loan. With this confidence, can come a lower mortgage interest rate which will save you more money in the long run.
2. Pay less for your home.
Interestingly enough, when you get a mortgage, the larger your down payment, the smaller your loan amount will be. If you can start off by paying 20% of the cost of your loan up front, you will only pay interest on the remaining 80%. If you only put down 5%, you will pay interest on the remaining 95%, which will end up costing you more over the life of your loan.
3. You will have a competitive advantage
Sellers want to have confidence in a buyer’s ability to get financing and when they receive multiple offers on their home, your offer will stand out to them if it comes in with a 20% or larger down payment. Just like a lender will have more confidence in you, the seller will also see you as a strong buyer who will be more likely to have their financing approved.
4. No Private Mortgage Insurance (PMI)
When you put down less than 20% when buying a home, your lender will see your loan as having more risk. PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%. Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.
When home home sellers look to move up to a larger or more expensive home they are able to take the equity they earn from the sale of their house to put down 20% on their next home. With the equity homeowners have today, it creates a great opportunity to put those savings toward a 20% or greater down payment on a new home. If you’re looking to buy your first home, consider the benefits of 20% down versus a smaller down payment option.
What to do next
If you’re thinking of buying a home and are already saving for your down payment, we can meet either in person or virtually to discuss what fits best with your long-term plans. Contact us today!