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Why is 20% the Ideal Down Payment?

Why is 20% the Ideal Down Payment?

  • July 1, 2014
  • Amy

You’ve probably heard that it’s best to put 20% down on a house for a down payment. This number has been the industry standard for years. If you’re struggling to make a 20% down payment, here are some reasons why 20% is the ideal down payment and why you might want to save up a little more money:

Increased Chances of Receiving a Loan.

Many banks are hesitant to lend money to someone who can’t put down 20% because they represent a higher risk than someone who can afford a 20% down payment. If you put down the full 20%, you will have increased chances of receiving a loan because your risk level will be at a minimum.

Smaller Monthly Mortgage Payment.

If you put down a larger down payment, you will have to borrow less money. This means that your monthly mortgage payment will be smaller, because you will be borrowing a lesser amount overall.

Lower Interest Rate.

If you can afford to put down a 20% down payment, you will enjoy a much lower interest rate than you would with a lesser down payment. The reason for this is that you represent a lower risk, which means the lender can afford to have you paying less overall on the loan. This lower interest rate could save you thousands of dollars over the course of the loan.

Zero Private Mortgage Insurance (PMI).

Private mortgage insurance is a requirement if you put down less than 20% of a loan’s purchase price. PMI is a way for lenders to ensure they are protected in the event that you default on a loan or need to foreclose on your house. If you don’t put down 20% initially, you will have to pay this mortgage insurance for the lifetime of the loan. This could cost you thousands of dollars over the 15 or 30 years it takes you to pay off your loan.

Instant Equity.

The bigger down payment you put forth, the more equity you will have in your home. This large down payment will protect you and your home’s investment if the market turns on you.

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