Historically, lenders have required potential homebuyers to have a 20 percent down payment in order to qualify for a mortgage. As there were very few options available for those who hadn’t saved or couldn’t afford to save this substantial amount. The reality was that for most potential buyers a 20 percent down payment was unavoidable.
It was the only way to show banks and lending institutions that you were financially responsible enough for homeownership.
Today, however, homebuyers have far more options available to them, many of which don’t require the 20 percent down payment. That comes as a relief to many first-time buyers who don’t have the equity of an existing home to help with their purchase.
Whether you can afford to pay 20 percent down or not, you should weigh up the benefits and drawbacks to make a decision that is in your best interest.
Benefits Of 20 Percent Down
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Fewer Additional Fees:
If you’re able to put 20 percent down you can get a mortgage that has no private mortgage insurance and other similar fees. As lenders consider a borrower with less than 20 percent for the down payment to be higher risk, they charge additional fees to serve as insurance on these loans.
Less Interest To Pay:
Putting 20 percent down also means you’re borrowing less. Because every dollar you borrow will be charged interest, the less you borrow the lower your repayment costs should be over the life of the loan. If you have the ability to save 20 percent, this benefit will be quite significant.
In Canada you can avoid mandatory CMHC housing insurance fees! You can get way further ahead by putting 20% down as you can start paying down on you mortgage right away, instead of the few thousand dollars they’ll add to you mortgage if you have less than 20% down.
Drawbacks Of 20 Percent Down
Having Little Funds For Other Expenses:
If you’re putting all of that money down as a down payment, you may find yourself cash strapped and unable to afford the essentials that come with owning a home like new furniture or closing costs on your mortgage. The Consumer Financial Protection Bureau warns that significant downside can be catastrophic, especially for first-time buyers who have a lot of expenses as they make the move into their first home.
Making Yourself Financially Vulnerable:
Many people find themselves digging into their other investments, like their 401(k), to come up with the money for the down payment. When mortgage interest rates are low taking out savings from a retirement plan or fund will only have far-reaching financial repercussions. Paying a bit more in interest over the life of a mortgage is far better as you’ll still get significant compound interest on your savings/
The Longer You Wait The Pricier Homes Become:
Saving 20 percent can actually be counterproductive depending on how quickly you’re able to save the cash. If you think about it, every year the value of homes will rise. We’ll say at 5% annually. If you’re able to save 20% in two years, the home would have increased by 10%. For every year you spend saving the pricier homes on the market become.
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Can You Buy With Less Than 20 Percent Down?
The good news for first time buyers is that you are able to purchase a home without a down payment of 20%. According to Freddie Mac, 40 percent of homebuyers in today’s markets are making down payments of less than 10 percent. If you’re deciding to take this route these are your options:
If you have strong credit, many lenders are still offering piggyback loans. These loans allow you to take out a smaller loan for part of your down payment, then a traditional mortgage for the rest of the purchase price. You may still need about 5 percent of your own money to put down on the purchase. Working with a lender to make up the remaining 15% in short term loans.
Down Payment Assistance
Down payment assistance usually comes in the form of programs made available through the government or non-profit organizations. Giving new homeowners a hand in coming up with the down payment they need to purchase a home.
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Low Down Payment
USDA loans, VA loans, FHA loans and similar loan products are designed to help those with only a little to put down on a home. For example, the FHA loan is a government-backed loan that requires just 3.5 percent down on the home. In some cases USDA loans come with no down payment requirements. You should be aware that these options come with fees that could significantly increase your monthly repayments.
Whatever choice you make, whether to be prudent and save the 20% or to forego the benefits of waiting and purchase a home now you should always seek financial advice. After all, owning a home is a financial decision.