If you take out a conventional mortgage and put down less than 20% of your home’s purchase price, you’ll have to buy private mortgage insurance. PMI will protect the lender if you default on your mortgage. Making a down payment of 20% or more can help you avoid PMI, but it may not be the best option for you.
Reasons to Put Down at Least 20%
Private mortgage insurance can be expensive. It can add a hundred dollars or more per month to your total cost of homeownership. You’ll have to keep paying for PMI until you reach at least 20% equity by paying down your mortgage balance, having your home’s value appreciated or a combination of both.
You may have to pay for PMI for years. That additional expense may strain your budget and leave you with less money to put toward your other priorities, such as saving for retirement and your children’s college education, or paying off credit card bills. If you put down 20% or more, you won’t have to purchase PMI.
Why Making a Smaller Down Payment May Be a Better Option for You
If you plan to buy a relatively expensive house, 20% of the purchase price can be a lot of money. It may take you years to save that amount. In the meantime, you’ll have to continue paying rent when you could be building home equity.
Many lenders will let you buy a house with much less than 20% down. Making a smaller down payment may force you to buy PMI, but it will also give you an opportunity to become a homeowner and start building home equity sooner.
Putting down 20% to buy a house may force you to drain your savings account. That’s a bad idea because it can leave you without funds to cover new furniture and appliances, home repairs and maintenance, emergency car repairs, an unexpected medical bill or a job loss. If you make a smaller down payment, you’ll be able to keep money in savings and will be prepared to weather a financial setback.
Look at the Big Picture
You don’t necessarily have to put down 20% to buy a house. Although doing so can help you avoid paying thousands of dollars over several years for private mortgage insurance, making a smaller down payment may be a better option. It will allow you to buy a house sooner and will also leave you with funds to deal with the unexpected. Consider your financial situation and goals, and carefully weigh the pros and cons to figure out what down payment amount is best for you.
