If you are in the market for a new home, you have probably heard from your realtor or from experienced friends that you need to put "20% down." If you are new to home buying, that terminology means that you should be able to pay 20% of the total cost of the house immediately, with your own money. If you were buying a $200,000 home, that would mean that you would pay $40,000 up front. That is a lot of money! You may think to yourself "Is this really necessary? Or is it just an old wives tale?"
Currently, most lenders will not force you to pay 20% down. How much you are required to put down will vary, depending on the type of loan and your situation. However, paying 20% down is a great rule of thumb to follow for many reasons.
- No Private Mortgage Insurance (PMI) PMI is extra insurance that is required specifically when you do not put down 20%. It is added onto the cost of your mortgage each month. These premiums are put in place to protect your lender in case you default and your home goes into foreclosure. This insurance is not optional, and you are required to pay it! Once the principal balance of your mortgage is below 80% of the original value on your house, you can cancel PMI, but until then, you are stuck with it!
- Lower Interest Rate You are likely to qualify for a lower interest rate. This will save you money in the long run!
- Smaller Payments The more money you put down, the less you will owe on your loan. This means that you will make smaller payments each month, which leaves you with more money for other things.
- More Likely to Qualify If you are able to put 20% down on your home, you are more likely to qualify to even get the loan. When attempting to purchase a house, the lender will check your credit background and also look at your debt-to-income ratio. This means that they will add all your debt up (including the mortgage), and compare it to how much money you make. If the percentage is too high, you will not be able to secure the loan.
- Equity Putting 20% down on your home gives you instant equity in it. This will protect you when the market fluctuates. If you are put in a position where you must sell the house, you are likely to be able to do so easily. Even if you stay in the home for the long term, having equity in your house is desirable.
- Saving Skills Saving money to make a down payment on a house teaches a person how to effectively save money to work towards goals. This is a great skill to have, and will help you in the long run!
- Focus on Other Things Once you have purchased your home, you can start focusing on saving for other things. You can put more money towards your retirement, or work on saving for your children's college education!
Putting 20% down on a house has a great number of benefits. Even though it isn't a requirement, it can help set the pace for the next 15-30 years of loan payments and saving for your future. Talk to your realtor, such as Lambert Realty, LLC, for more information.