One of the most enduring misconceptions about home buying is that you need to pay at least 20 percent of the home’s purchase price as down payment. While this was true a few decades ago, it’s no longer a hard-fast rule today.
Can you buy a home with less than 20 percent down payment? You definitely can! However, deciding the matter takes more consideration than just whether you can afford it or not.
[sc_content_link label=”Get today’s rates!”]
Then vs Now
In the conventional notion of home buying, if the buyer can’t pay for the purchase of the home in cash, he or she puts down 20 percent down payment instead and takes out the remaining 80 percent from a mortgage.
After the buyer successfully gets a loan approval, the money is dispensed and the mortgagee now starts paying a monthly mortgage payment for the entire length of the loan’s amortization period, or until the buyer decides to sell the home. In this case, the loan is repaid in full from the proceeds of the sale.
This is how mortgages used to be. It does not mean however that the process has changed completely. The process has evolved throughout the years to cater to the changes in the market and the needs of the consumers.
The rationale behind the 20 percent
Before you rush into the decision of paying less than 20 percent for your down payment, consider first why it is recommended by most experts.
Perhaps the strongest argument for why you should do so is to avoid paying for mortgage insurance. Typically, your mortgage insurance can cost you around 0.5 to 1 percent of the entire loan amount per year.
If you put more money on your down payment, your lender is most likely going to give you a lower interest rate, resulting to lower monthly payments. Oftentimes, a single point difference in rates can determine whether your mortgage is affordable for you or not.
Another benefit for paying the conventional 20 percent down payment is to earn equity faster. That also means paying off your loan faster.
Furthermore, you will pay less in closing as most closing charges are based on the size of the loan.
[sc_content_link label=”Need financing? Let us help you out.”]
Why you don’t need a 20 percent down payment
It’s no news that home prices today have significantly increased in most major areas in the country. Suddenly, those who think they have saved enough for down payment find themselves unable to afford the new price tags on the homes.
Fortunately, the conventional 20 percent down payment requirement does not necessarily apply today. You can buy a home even with 3 percent down payment. There are even programs today that offer 100 financing.
Some experts put forward good rationales as to why you shouldn’t put a mega down payment when you buy a home:
More liquidity. A home is a good investment but if you’re low on savings and have little cushion for potential emergencies, investing all your cash in down payment may not be a good idea. Your home investment is not liquid. That is, you can’t just cash it out when you need it. Some people prefer to keep their funds accessible and flexible.
More lucrative choices. Some buyers prefer to invest their money on investments with high returns.
Risk of loss. If you put all your savings to pay the down payment of your home and the value of the property decreases after a time, you are at risk of losing money on your property.
At the end of the day, it all boils down to your own priorities and finances. Take time to explore your options and make sure you’ve adequately weighed in the pros and cons of a decision before you finally take that path.