6 Reasons to Love a 20% Down Payment

The gold standard that so many people forgot about.

Mar 23, 2014 at 9:00AM

There are many challenges that come into play when you’re in the market to buy a home. According to Trulia's American Dream survey, consumers said the number one obstacle to homeownership was saving enough for a down payment. What exactly is the down payment? It’s the amount of money that you, the buyer, kick in out of your own pocket, right at the start, toward the purchase of the house. But exactly how much do you need to put down?

A smart rule of thumb is always try to put 20 percent down. Period. It’s the gold standard that so many people forgot about when they were buying homes they could not afford in the mid 2000′s.

But what does one need to understand to help you come to terms with the 20 percent down number? Let us explain. See below for all the reasons why you should love the idea of a 20% down payment.

1. Improved Chance You Will Actually Get That Mortgage
The first and biggest reason to come up with 20 percent down is that in today’s mortgage marketplace, many banks won’t give you a mortgage unless you come up with at least that much money prior to buying a house. The loan programs that once existed for 10, 5, and even zero percent down payments are far fewer now than in the past – and for good reason!

2. The Consumer Financial Protection Bureau Just Changed All The Rules!
New “Qualified Mortgage” rules were just issued by the Consumer Financial Protection Bureau. Now, homebuyers will have to meet a 43% debt-to-income ratio. That means that after you add up mortgage payments, property taxes and other debt, like revolving credit card balances, car or student loans, your total debt has to be less than $43 for every $100 in income you earn per month. Putting 20% down reduces the size of your monthly mortgage payment, making you more likely to qualify for – and afford – a mortgage.

3. A Smaller Monthly Mortgage Payment!
Who doesn’t love to pay less? I know I simply adore a smaller payment. More money down means you borrow less, which means you will have a smaller mortgage, which means you will always have a smaller, more affordable monthly mortgage payments.

4. A Lower Interest Rate = You Pay Less Over The Life Of The Loan
The interest charged on a loan with 20 percent down is often lower than the interest on a loan with less money down. Your lower interest rate will save you thousands, if not tens of thousands of dollars, over the life of the loan.

5. No private mortgage insurance (PMI)
Putting 20 percent down allows you to avoid private mortgage insurance. Also called lender’s mortgage insurance, PMI is extra insurance that lenders require from most homebuyers who obtain loans in which the down payment is less than 20 percent of the sales price or appraised value. Many lenders will even add a percentage that is much like an insurance policy onto the mortgage interest rate. Ouch!

6. Instant Equity Building
A significant down payment builds instant equity in your home. A 20 percent down payment immediately puts equity into a property when you purchase it. That down payment safeguards you if the market turns downward temporarily.

This article originally appeared on Trulia.com

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