Why It’s More Important Than Ever to Put 20% Down on Your Home

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  • If you don't make a 20% down payment on a conventional mortgage, you'll face an added expense in the form of private mortgage insurance.
  • It's also important to make a 20% down payment when you're buying a home at a time when prices are elevated, as that could help you avoid becoming underwater on your mortgage.

It's not just about avoiding added costs.

These days, making a 20% down payment on a home is no easy feat. That's because the median home sale price in January was $359,000, as per the National Association of Realtors. To put down 20%, you're talking about saving up almost $72,000 -- and that assumes you're not looking at a more expensive home.

When you're taking out a conventional mortgage loan, it's a good idea to aim for 20% to avoid having your home cost you more money. When you don't put 20% down at closing, you're hit with private mortgage insurance (PMI), which is meant to protect your lender, not you.

PMI often gets tacked onto your monthly housing payments so you're spending more. But that's not the only reason to be aiming for a 20% down payment today.

Buying a home when prices are elevated

Buying a home when prices are up doesn't just mean paying more. It also means that there's a good chance the value of your home will drop in the near term.

If homes in your area normally sell for $300,000 but have been consistently selling for $360,000 due to current housing market conditions (such as limited inventory), then buying at that higher price point means you're taking a bit of a risk. Chances are, in the coming years, the value of your home will start to creep back down toward the $300,000 mark.

That's not a problem if you're not looking to sell your home, or you're not having trouble keeping up with your mortgage payments. But if you start to run into financial difficulties, you'll want the option to sell your home at a price that allows you to pay off your mortgage. And if you don't make a 20% down payment, that may not happen. Rather, you could wind up underwater on your mortgage.

When you're underwater on a mortgage, it means your current home value isn't enough to pay off your lender in full. That can be bad when you need to get out of a housing situation fairly quickly. But a 20% down payment makes it less likely that you'll wind up underwater.

Let's say you put down $72,000 on a $360,000 home, leaving you with a $288,000 mortgage. Let's also say the value of your home drops to $300,000 in three years. In that case, if you need to get out, you're okay -- you can sell your home for more than what you owe your lender.

But let's say you only make a 10% down payment, leaving you with a $324,000 mortgage. If your home is only worth $300,000, and you haven't chipped away at that much mortgage principal (which is generally the case when you're only three years into your repayment period), then you might get stuck in a really tough spot if a sudden need to sell arises.

Don't skimp on a down payment

Putting less than 20% down on a home can be a risky move in general. But it can be especially problematic if you're buying in a market where home prices are elevated. Since that's the case today, you may want to hold off on a home purchase if you don't have the funds to put down 20%.

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