The Benefits of Homebuyers Putting 20% Down

If 2022 is the year to buy a home, congratulations on starting the homebuying journey! Part of the journey, and a large part of it, is assessing finances. One financial aspect homeowners go back and forth between is how much to pay in the down payment. Here are four reasons why homebuyers benefit when they put down 20% for their new home: 

Benefit #1: Lower Interest Rate

When you put down a higher down payment, you’re proving to your mortgage lender that you are financially stable and are not a risk. Plus, when you combine a large down payment with a good credit score, the piece that proves you can handle debt, the more confident your lender will be in your ability to pay back the loan. When your lender feels secure in your financial abilities to pay off the loan, they’re more likely to give you a better interest rate. 

Benefit #2: Pay Less Money 

The more you put down means a smaller loan amount, which also means a cheaper monthly mortgage payment. When you put down 20% of the cost of the new home, you’re only responsible for the remaining 80%. If you put down less than 20%, such as 3-5%, as most homeowners do, the remaining percentage is added to your loan and will gain interest over time. Plus, most lenders require private mortgage insurance when a homebuyer doesn’t put down 20%. This is a fee to protect the lender, not you. This will cost you more money over the lifetime of your home loan. 

Benefit #3: You Stand Out Against Competition

In a fast-moving real estate market like ours with limited homes on the market, it’s causing buyers to compete against each other. A way to stand out against the competition is a 20% down payment. As we mentioned earlier with the lender, this shows the seller that you are financially stable, which means they’ll have more confidence in you. You are seen as a stronger buyer as your financing is more likely to be approved. And approved financing means closing will happen quicker and easier. 

Benefit #4: Not Paying PMI

Remember that private mortgage insurance (PMI) we mentioned earlier? It’s so important it gets its own bullet point! Private mortgage insurance is tacked onto a monthly mortgage payment by lenders when homebuyers put down less than 20%. This fee protects the lender if you cannot pay for your mortgage. A homeowner will pay this fee until they reach 20% equity of their home, then PMI can be canceled. But with PMI and a high-interest rate, it could be a while until 20% equity is reached, so you pay more money over time. 

 

If you need help creating a financial plan to buy a home this year with a 20% down payment (or not, we can help with that too!), contact the David Morris Group. We’re happy to be your helpful guide. Give us a call at (775) 828-3292.