According to reports, 2 in 5 people think that 20% is the minimum down payment on a house you can make.
This is far from the truth. In reality, very few people make down payments of 20%.
Currently, the average down payment Americans are putting up is 5.3%. As you can see, low down payments aren’t just possible, they are actually the norm.
But are low down payments safe, or wise? If you have the money shouldn’t you always opt for a large house down payment?
There are numerous reasons why home buyers are opting for low down payments. In some cases, buyers just don’t have the savings available for a large house down payment. However, there are also several reasons why you shouldn’t opt for a large down payment on a house.
Wondering how much of a down payment on a house is wise? Keep reading to find out.
Benefits of Making a 20% Down Payment on a House
Before we get into the reasons why you might not want to put a 20% down payment on a house—let’s first look at some of the advantages of high down payments.
Putting down 20% on a house down payment has the perks of lowering your monthly payments, interest, and closing costs. It also eradicates the need for mortgage insurance. However, these advantages aren’t always as valuable as they seem.
You Won’t Have to Pay Mortgage Insurance
One of the primary benefits of committing to a 20% down payment on a house is that you won’t need to take out mortgage insurance. If you opt for a lower down payment, you will have to take out mortgage insurance, which is generally around 0.3% to 1.5% of your mortgage.
However, keep in mind that having mortgage insurance isn’t all bad. It ensures that your property investment and home are protected from foreclosure due to unforeseen circumstances.
Your Monthly Payments Will Be Lower
Another benefit of putting down 20% on a new home down payment is that your monthly mortgage payments will be lower. The more you pay upfront, the less you will need to pay off—which either means shorter terms or lower payments.
However, depending on your income, this might not be reason enough to sacrifice a large down payment.
You’ll Pay Less in Interest
Besides lowering your monthly payments, committing to a 20% downpayment on a house allows you to pay less interest.
When taking out a mortgage, you pay interest on the amount you borrow. Paying a larger house down payment upfront means you will owe less on the home. This, in turn, means you will pay less interest on the debt.
However, if the size of your down payment is the difference between you buying a home or renting, the extra money you’ll pay can be worth it. If you run the numbers through a mortgage calculator, you’ll see that choosing a reduced down payment shouldn’t trigger an exorbitant increase in interest over time.
What’s more, if making a lower down payment is what will allow you to buy a home rather than rent, this has positive financial ramifications. Instead of paying an expense every month for where you live, instead, you’ll be building an asset. This is advantageous, even if it does come with slightly higher interest costs.
Lower Closing Costs
Another advantage of making a 20% down payment on a house is your closing costs will be lower than if you opted for a smaller down payment.
For instance, origination fees are determined by the value of the home in question. Origination fees are 1% of your home loan. If you make a down payment of 20%, this will result in a lower loan amount, and with that, a reduced origination fee.
However, making a larger down payment can force you to roll your closing costs into your mortgage, which will trigger higher interest costs and cancel out this saving.
Drawbacks of Making a Large Down Payment
While there are some perks to placing a 20% down payment on a house, there are also many advantages to securing a low deposit mortgage.
Contrary to popular belief, paying a smaller deposit isn’t a risky move. In fact, it can actually be less financially risky.
More Money for Closing Costs
One of the immediate advantages of opting for a low down payment on a house is it leaves more money for closing costs. If you’re a new home buyer, you might be unprepared for closing costs, which are typically between 3%-6% of your new home’s value.
In some cases, you may be able to roll your closing costs into your mortgage. However, this isn’t a given. If doing so will push your total loan over the lender’s LTV and DTI thresholds, then you won’t be able to roll over closing costs.
By opting for a lower downpayment, you will have extra money in your pocket to pay for all your closing costs.
More Money for Unexpected Repairs and Expenses
Committing to a lower down payment on a house also means you’ll have more money left over for surprise expenses and repairs. Buying a home always comes with the risk of unexpected repair costs. No matter how thorough the inspections were, you never know when an issue might pop up that’s costly to fix.
Have a cushion of cash left over after your down payment means you’ll be better equipped to handle these unpredictable expenses.
More Money to Invest and Better Investment Diversity
If you opt for a lower house down payment and have money left over, this leaves you in the position to invest it into other assets. Instead of having all your eggs in one basket, you’ll be better able to diversify.
Diversifying your investments is an age-old financial rule of thumb.
Another benefit of making a smaller down payment on a house is that it reduces your risk should the real estate market dive.
When you make a low down payment, you shift most of the risk of your purchase to your lender. If the housing market crashes, you will have a lot less equity to lose than if you made a house down payment of 20%.
Is the Downpayment on a House Holding You Back From Owning a Home?
If coming up with a 20% down payment on a house is holding you back from buying a home, it’s time to re-evaluate. As you can see, most people are committing to far lower down payments.
What’s more, opting for a low down payment has various advantages. Besides getting you into the market, it’s also less risky, provides a cushion for the unexpected expenses that come with new homes, and allows you to diversify your investments.
Now that you know how common and advantageous it is to select a lower house down payment—are you thinking about re-evaluating your mortgage options?
If so, contact us today. We specialize in matching buyers with the right mortgages for their unique requirements.