Who can afford a 20% down payment? Wait till you ask stated income borrowers whose minimum down payment is 30%. You’d like to ask, “Why would anyone put that much down payment when you can save up to as little as 3.5% or zero percent down even?” Let these four major benefits answer the question for you.
A Bigger Down Payment Will Always Be Better
Putting down 20% of the purchase price reigns supreme in terms of:
- Private Mortgage Insurance
- Monthly Payment
- Costs and Rates
- Bidding Wars and Price Declines
Goodbye Private Mortgage Insurance
A 20 percent-down guarantees that you won’t be paying any private mortgage insurance (PMI). Not paying between 0.5% and 1% a year for a mortgage insurance alone is a huge relief for your pockets.
These savings can be funneled to general repairs and maintenance your home might be needing in the future.
Monthly Payment for Less
Imagine buying a home with a price tag of $200,000. If you put at least 20% of that purchase price, which is $40,000 and take out a 30-year loan for the remaining $160,000 at 4.25%, your monthly payment will be $787.10.
Compared that with putting a downpayment of 3.5% or $7,000 and borrowing $193,000. For the same loan term and interest rate, you’ll be making $949.44 in monthly payments.
Less Borrowing, More Savings
The above calculations lead to this point: if you have borrow less, you’d pay for less in interest costs. For the mortgage with the 20% down payment, the total mortgage with interest that you’ll be paying is $283,357.38. The total mortgage with interest that you will be paying for the loan with the 3.5% down payment is $341,799.84.
The bigger the loan, the more costly it is to borrow. Which is why lenders put a higher rate on bigger loans, especially those that go beyond the conforming limit or jumbo loans. With a higher down payment and a lower amount to borrow, the lender can give you a better rate and lesser fees to open this loan.
For a Good Start
A higher down payment ensures that you have enough equity of 20% early on in your loan. This mitigates the risk of a negative equity position should housing prices go under as what happened during the housing collapse a decade ago.
Indeed, a big down payment ensures or increases the likelihood of you winning a multiple-bid war. A bid backed with 20% or even 30% off the purchase price is enough to get the seller’s attention.
Big for Less?
A large down payment serves to compensate some “bad” aspects of your loan like a bad credit score so it can still stand for approval by the lender.
Producing 20% of the purchase price is a lofty goal, an idea worthy to be considered if you think long term. However, no one is looking down on your ability to produce a little down payment. Just find ways to cut back on the other costs of your loan if you plan to make a small down payment.