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What Are the Benefits of a 20% Down Payment? | Simplifying The Market

If you’re in the market to buy a home this year, you may be wondering how much money you need to have for your down payment. Many people may think that they need 20% of the loan to secure the mortgage. While there are plenty of options available with a lower down payment for qualified buyers who don’t want to put up 20%, it’s important to understand how a larger down payment can also have great benefits.

 

The truth is that there are many programs available that allow you to put in as little as 3.5%, which can be a great benefit for those who want to buy a home as soon as possible. Those who have served our country may qualify for a Veterans Home Loan ( VA ) and may not need a down payment . These programs have actually reduced the time savings for many potential buyers, allowing them to start building wealth faster.

Here are four reasons why putting in a 20% down payment is a good plan if you can afford it.

1. Your interest rate will be lower.

Putting in a 20% down payment instead of a 3-5% down payment shows your lender that you are more financially stable and not a great credit risk. The more secure your lender is with your credit score and ability to repay your loan, the lower the mortgage interest rate they will be willing to give you.

2. You will end up paying less for your home.

The higher your down payment, the lower your mortgage loan amount. If you can pay 20% of the cost of your new home at the beginning of the transaction, you will only pay interest on the remaining 80%. If you put in a 5% down payment, the additional 15% will be added to your loan and will accrue interest over time. This will end up costing you more over the life of your home loan.

3. Your offer will stand out in a competitive market.

In a market where many buyers are competing for the same home, sellers like to see offers with a 20% down payment or larger down payments. The seller gains the same trust as the lender in this scenario. You are seen as a stronger buyer whose financing is more likely to be approved. Therefore, the agreement will be more likely to be approved.

4. You will not have to pay for private mortgage insurance (PMI)

What is the PMI? According to Freddie Mac :

Private Mortgage Insurance (PMI) is “ an insurance policy that protects the lender if you cannot pay your mortgage. It is a monthly fee, included in your mortgage payment, that is required for all conforming and conventional loans that have less than 20% down payment. Once you’ve created a 20% equity in your home, you can cancel your PMI to eliminate that expense from your mortgage payment . “

As we mentioned earlier, when you put less than 20% to buy your home, your lender will see your loan as having more risk. PMI helps them recoup their investment if you cannot pay your loan. This insurance is not necessary if you can put 20% or more.

Many times, home sellers looking to move into the largest or most expensive home can take the equity they earn from the sale of their home to put a 20% down payment on their next home. With the equity that homeowners have today, they have a great opportunity to put that savings toward a down payment of 20% or more on a new home.

If you are looking to buy your first home, you will want to consider the benefits of a 20% down payment compared to the option of a smaller down payment.

In conclusion,

If you’re thinking of buying a home and are already saving your down payment, let’s get in touch to decide what best fits your long-term plans.

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