Why I Would Never Buy a Home With Less Than 20% Down
It's a matter of not wanting to throw away my money.
- I work hard for my money and don't believe in throwing it away.
- I refuse to create a scenario where a mortgage lender gets extra money from me and I get nothing in return.
When my husband and I decided to purchase our current home, we opted to put down 50% at closing. That's much higher than the standard 20% buyers are advised to come up with.
We had our reasons for making such a big down payment -- largely, to keep our monthly mortgage payments reasonable. But at several points, we toyed with the idea of sticking to a 20% down payment rather than tying up so much cash in our home.
While we contemplated going as low as 20% on the down payment front, not once did we consider making a down payment of under 20%. And there's a big reason why.
Why lose money needlessly?
Though some mortgage lenders might require a 20% down payment at closing for a conventional home loan, many will accept less. In fact, I have a friend who recently purchased a home, and she put 10% down at closing. But the reason I would insist on a 20% down payment is simple -- I wouldn't want to pay private mortgage insurance, or PMI.
At first glance, private mortgage insurance might seem like a good, helpful thing, the same way health insurance covers your medical costs and auto insurance covers you in the event your vehicle is damaged. But make no mistake about it -- PMI is not meant to protect you, the borrower. Rather, it's meant to protect your lender in case you default on your mortgage payments. That's not something I want to pay for.
The cost of PMI can vary, but it commonly amounts to 0.50% to 1% of the loan amount. So if you take out a $300,000 mortgage without at least a 20% down payment, you could get stuck paying up to $3,000 a year in PMI. All told, that's an extra $250 a month you could be spending on other things, whether it's home renovations, maintenance, or bills having nothing to do with your property.
The other thing that bugs me about PMI is you don't get that money back. When you make your regular mortgage payments, some of that money goes toward interest on your loan, but a chunk of it goes toward your principal. PMI payments don't help you chip away at your mortgage balance, and so they're an expense I'd work hard to avoid -- namely, by waiting to buy a home if I didn’t have a 20% down payment.
Don't throw your money away
I've never been the type to throw money away. It's why I make a point not to carry a balance on my credit cards, and it's why I wouldn't buy a home without being able to bring 20% to my closing. Now this isn't to say I won't borrow money as needed. Case in point -- I have a mortgage, and the money I spend on interest is money I can't and won't get back.
But having a mortgage was also, at the time of my home purchase, a necessity for me. I couldn't afford to buy my home outright. There's a difference between paying mortgage interest and PMI, and if you'd rather avoid the latter, make sure you have 20% of your home's purchase price available before moving forward with a mortgage.
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