The 20% Rule for Down Payments

A good down payment can save you money in the long run. The traditional rule of thumb has been 20% down on a house. Putting at least 20% down can help you in several ways:

1. Private Mortgage Insurance (PMI)

Any borrower who puts down less than 20% is required by the lender to carry Private Mortgage Insurance (PMI). This protects the lender from risk while allowing the borrower to put down a lower down payment. The cost of PMI can be significant. If you carry PMI at a 1% rate on a $100,000 loan, you will be paying $1,000 per year until your principal balance is less than 80% of the value of your home.

2. Lower monthly payments

If you are able to put at least 20% down on a house, you have just paid 20% of the total equity. Your interest rates are likely to remain the same, but there is effectively less of the total price to pay interest on. You will save money in the long run by doing this because you will be able to pay off accrued interest faster and start paying on the actual equity sooner. The more you put down initially, the less you will have to pay per month.

3. Negotiating ability

By coming to the table with a large down payment, you take a considerable amount of risk off of the lender. Since the lender has to absorb less risk, you have more room to negotiate a low mortgage rate. The leverage to negotiate with lenders during this process can prove to be invaluable. Being able to put at least 20% down on a house is also attractive to the seller because they will not have to wait for any additional money to clear through a third party. With a 20% down payment, it will be much easier to deal with both the seller and the lender.

 

There are still many options available to you if you are not able to afford a 20% down payment, but clearing the 20% threshold has many benefits that you may want to consider.

 

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