One-Third of Millennial Home Buyers Plan to Make Less Than a 20% Down Payment. Here's Why That's a Mistake
- A recent survey reveals one-third of younger buyers intend to put less than 20% down on a real estate purchase.
- A down payment of under 20% could result in higher borrowing costs.
It pays to aim for 20% down on a home for one big reason.
Coming up with a down payment for a home is no easy feat. This especially applies if you're a younger buyer and haven't been in the workforce long, thereby narrowing your savings window.
Some conventional mortgage lenders will allow you to purchase a home with 5% down. Others may require 10% or more, but it's a good idea to bring a 20% down payment to the table when buying a home.
Yet in a new survey by Real Estate Witch, one-third of millennials who are looking to buy a home said they planned to put down less than 20% at closing. That's a mistake they might regret.
Why a lower down payment could hurt you
These days, home values are up across the board. Coming up with 20% of a home's purchase price is a tougher ask than ever. In spite of that, it really pays to bring 20% to the table. If you don't, your mortgage might cost you a lot more.
If you take out a conventional mortgage and don't make a 20% down payment, you'll be stuck paying private mortgage insurance, or PMI. But don't let the word "insurance" fool you. PMI isn't meant to offer you any protection. Rather, it's meant to protect your lender in the event you default on your mortgage payments.
PMI can equal up to 1% of the amount you're borrowing in your mortgage, and it's commonly paid on a monthly basis. This means if you're taking out a $300,000 mortgage, you might get stuck paying $3,000 in PMI every year. That's an extra $250 a month that'll be tacked on to your existing mortgage payment. And it's money you'd probably rather keep for yourself.
Consider holding off on buying a home
If you don't have enough money socked away to comfortably make a 20% down payment on a home, then you may want to hold off on buying. For one thing, you don't want to get stuck with PMI. But also, if you don't bring a 20% down payment to your closing, you might end up in a scenario where you're underwater on your mortgage if property values fall.
When you're underwater on your mortgage, it means your home is worth less than your mortgage balance. It's not a great situation to be in, because if the need to sell arises (such as if you lose your job or need to relocate for work), you're out of luck. Even if PMI didn't exist, it's still a good idea to start off homeownership with 20% equity.
While it's easy to see why millennial buyers might struggle to come up with a 20% down payment in today's housing market, it's a better idea to hit that 20% target before moving forward with a home purchase. If you're not there yet, there's no shame in that. But it definitely pays to consider waiting.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
Copyright © 2018 - 2023 The Ascent. All rights reserved.