Down payments: Why 20% is still the best way to go
If you’re in the market to buy a home, perhaps you’ve heard that you have to make a 20% down payment or you won’t be approved for a mortgage. The truth is, there are many lenders who would be willing to work with you for a down payment much lower than that. Some don’t even require any down payment at all.
Knowing this, you’re probably asking why so many people still recommend that you make sure you go with 20% to put down on a home.Let David & Sunny, top-ranking Realtors in Silicon Valley, enlighten you on the different advantages of a higher down payment, especially if it aligns with your financial goals.
No need for private mortgage insurance
Lenders have a tool for protecting themselves in case you’re unable to pay your mortgage, and it’s called private mortgage insurance or PMI. This type of premium helps mitigate the lender’s increased risk by giving you a loan with a lower down payment. PMI is a fee on top of your monthly payments, which often adds 0.5 to 1% to the loan amount. You can completely avoid this additional expense if you can put a 20% down or more.
Lower interest rate
Your down payment is inversely proportional to the interest rate you have to pay. A hefty down payment makes your lender more confident about your ability to meet your monthly payments, so the bigger the amount of the down, the lower the interest rate your lender will be willing to offer you.
Smaller monthly payments
A smaller mortgage amount spells lower monthly payments for you. Think about it: if you can make a 20% down payment on a home that costs $200,000, your loan will be $160,000. Over the course of a 15-year mortgage, you’ll only be paying $888 minus rates and other fees. On the other hand, if you make a measly 5% ßdown payment, your loan will be a heftier $190,000. This means you’ll have to come up with $1,055 every month for 15 years, and that’s not counting the higher interest rate and PMI you have to pay for.
Protection from price drops
People who are only able to put a minimum down payment are susceptible to a negative equity position even when house prices suffer a small decline. Thus, they end up with a property value lower than their outstanding balance. To cite an example, during the last recession, many homeowners who made a down payment of 5% found themselves in a negative equity position when housing prices dropped by 10%.. With a 20% down payment, you reduce the chances of finding yourself in such a predicament.
Do you have more inquiries related to real estate down payments? Please feel free to contact the David & Sunny team with your questions about homes in Silicon Valley. Negotiation experts David and Sunny are top-ranking Realtors in the Valley with more than 18 years of experience. Call us at 650.489.6251 or email davidandsunny(at)compass(dotted)com.