Should You Put 20% Down on a Home Purchase?

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Wondering how much money to put down a house is standard among prospective buyers, and especially for first-time homeowners. Like all things related to the mortgage process, there is no one-size-fits-all answer. Depending on the circumstances, it can be more strategic to put down less money. While conventional wisdom holds that a 20% down payment on a home purchase is the standard, there’s a lot more to the story.

Understanding Your Options

Because most people aren’t in the position of buying a home with cash, they use a down payment. It’s the difference between what a prospective buyer can buy and what they can borrow. The down payment can vary in size, and it’s typically described as a percentage of the home’s sale price. While different loan products will have specified minimum amounts, mortgage borrowers can put down as much money as they like. But while the conservative approach may appear to be putting down a large down payment, sometimes the opposite is true. In many cases, the smaller the down payment, the smaller the investment risk.

Let’s look at the pros and cons of small down payments. On the upside:

  • A faster path to homeownership — Saving for a small down payment can make homeownership more accessible. In the case of rising interest rates or home values in your area, that can be a big benefit.
  • More cash in hand — Tying up all of your money with the bank can be problematic in the event of an emergency. A lower down payment that doesn’t overly deplete your savings means you’re more liquid for things like home repairs.

On the downside of smaller down payments:

  • A longer path to building equity — Home equity is the current value of your home minus what you owe. Starting with a smaller down payment means less equity in the early years.
  • Mandatory PMI — Private mortgage insurance, or PMI, is required by most lenders with a down payment of 20% or less as a safeguard. You’ll be required to pay this monthly expensive on top of your mortgage payment until you reach 20%.

The Takeaway

Understanding the potential benefits and drawbacks to different down payments is an important part of the mortgage loan process. The Cushing Team here at Guild Mortgage in Reno can help you find the perfect loan for your needs, and offer guidance on an appropriate down payment based on your unique circumstances. If a new home is part of your plan for 2020, we’d love to help make it a reality. Contact us today.

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