If you are thinking of buying a home this year, you may be wondering how much money you have need invent your down payment. Many people may think that it is 20% of the loan to secure a mortgage. Although there are many lower down payment options available for qualified buyers who do not want to decrease 20%, it is important to understand how a larger down payment can also have great advantages.
The truth is, there are many available programs this allows you to take off just 3.5%, which can be a huge advantage for those who want to buy a home sooner rather than later. Those who have served our country are also eligible to qualify for a Home Loan for Veterans Affairs (flight) and may not be needed advance payment. These programs have really reduced the time saved for many potential buyers, enabling them to start building family wealth sooner.
Here are four reasons why dropping 20% is a good plan if you can afford it.
1. Your interest rate may be lower.
A 20% down payment versus a 3-5% down payment shows your lender that you are more financially stable and not a big credit risk. The more confident your lender is about your credit score and your ability to repay your loan, the lower the mortgage interest rate they will likely be willing to give you.
2. You will end up paying less for your home.
The higher your down payment, the smaller your loan amount for your mortgage. If you will be able to pay 20% of the cost of your new home at the beginning of the transaction, you will pay only interest on the remaining 80%. If you deposit 5%, the additional 15% will be added to your loan and you will get 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 come in with 20% or greater down payments. The seller gains the same confidence as the lender in this scenario. You are considered a stronger buyer with financing more likely to be approved. Therefore, the deal is more likely to end.
4. You do not have to pay Private Mortgage Insurance (PMI)
What is a PMI? According to Freddie Mac:
“A PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It is a monthly fee, introduced into your mortgage payment, required for all compliant conventional loans that have down payments of less than 20%. Once you have built a 20% equity in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As mentioned earlier, when you take out less than 20% buying a home, your lender will see your loan as more risky. PMI helps them to recoup their investment in you if you are unable to repay your loan. This insurance is not required if you can cancel 20% or more.
Many times, home sellers who aim to move up to a larger or more expensive home can take the equity they earn by selling their home to put 20% on their next home. With the stock homeowners today, it creates a great opportunity to save those savings to 20% or greater down payment on a new home.
If you want to buy your first home, you will want to consider the benefits of 20% less than a smaller down payment.
If you’re thinking of buying a home and are already saving for your down payment, let’s connect to discuss what works best with your long-term plans.
Content previously posted in Keep Current Things