You might have been told that you should put down 20% on a new home, but that’s not required. Lenders approve loans with much smaller down payments. Putting 20% down does have benefits, but it also has downsides and risks. Here are some things to consider.
Monthly Payment
Making a substantial down payment will reduce the amount you’ll have to borrow, which will translate to lower monthly payments. A large down payment will make you less risky from a lender’s perspective, and you might qualify for a lower interest rate. That will save you money every month and reduce the total amount you’ll pay in interest over the life of the loan. If interest rates are generally low, a large down payment might not make much of a difference, though.
Private Mortgage Insurance
If you take out a conventional loan and you make a down payment of less than 20%, you’ll have to purchase private mortgage insurance to protect the lender if you don’t keep up with your loan payments. PMI might add several hundred dollars per month to your total housing payment. You’ll have to pay for PMI until you have at least 20% equity. With a down payment of 20% or more, you can avoid PMI. That can make it easier to handle your monthly payments and save you a significant amount of money over time.
Impact on Savings
Draining your savings account to make a large down payment can leave you financially vulnerable. If your home needs repairs, a member of your family has unanticipated medical bills, or you or your spouse loses a job, and you have little or no savings left, you might struggle to make ends meet.
Time to Save for a Down Payment
If you don’t already have substantial savings and you don’t own a home that you plan to sell, it can take years to save up a 20% down payment. In that time, a lot can change. For example, home prices can rise, and your goal can become even more out of reach. If real estate prices and interest rates are affordable, it might be better to buy a house with a smaller down payment than to wait so you can save more.
Other Financial Goals
Saving enough to make a 20% down payment will leave you with less money to devote to other financial priorities, such as paying off high-interest credit card debt, investing for retirement and saving for your children’s college education. Setting a lower target for your down payment can give you the flexibility to work toward other financial goals at the same time.
Think About Your Whole Financial Picture
Numerous factors can come into play when making financial decisions, and everyone’s situation is different. Consider your current circumstances and goals and find the balance that’s right for you.
