Reasons To Save Up For A 20% Down Payment Before Buying A Home

When it comes to buying homes, the larger the down payment you’re able to plunk down the better. Finance experts advise you to aim for saving up at least 20 percent of the total purchase price, and the number isn’t arbitrary. There are very real benefits to making a hefty initial payment.

A Trulia blog post identifies several reasons to do so:

* Improved odds of approval. Banks are impressed with large down payments, and many lenders require 20 percent down to give you a loan.

* Avoid private mortgage insurance. Without 20 percent down, lenders will tack on an insurance fee to your monthly payment. It will stay with you until you gain enough equity and refinance.

* Lower payments and less interest. The less you owe on the house, the lower your payment will be and the less money you’ll waste on interest every month.

Seven Reasons To Put 20 Percent Down [Trulia]

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  1. The Nax says:

    Are there really any readers on this site who don’t already know this information?

    • Loias supports harsher punishments against corporations says:

      Sorry to waste your time. Perhaps there’s a better blog out there for you?

      • nbs2 says:

        This is a Phil article. I think that Nax’s post is en pointe.

        • The Nax says:

          After reading it, I assumed it was Phil and went back and checked. Sure enough…
          But my other point is that they are fairly obvious home buying “tips” and Consumerist is a site geared towards “savvy” consumers. They likely already know the obvious tips. I don’t go to a blog about baseball and expect to see an article describing how many strikes equal an out.

          • pecan 3.14159265 says:

            Consumerist is geared toward savvy consumers, yes, but even the savviest of consumers got there by doing the right research. I’ve never bought a home before – how would I know about all of these things unless I looked it up, or a site like Consumerist was able to give me information? I don’t see anything wrong with this article. I had no idea about any of this information. It wasn’t something I needed to know until I started looking for my first house a while back and now I’ve done my research and am much more savvy at the home buying process. Others could benefit from this information.

            This is the same as buying a car. If you’ve never bought a car before, how would you know the best ways of looking for a good one or what guides to look at for resale value? Things that seem obvious to some people are not generally obvious to everyone.

      • finbar says:

        Or he could just skip the article.

    • iamjustjules says:

      I’ve been trying to explain this to my partner, but they’re just interested in not paying rent.

    • nishioka says:

      The mortgage insurance one I wouldn’t have guessed, because I haven’t tried to buy a house yet.

    • homehome says:

      Actually alot of ppl do not know this. I deal with mortgagors all the time and you would be surprised that even after having their mortgage for 10 years how little they know about their mortgage. I’ve talked to many ppl abt PMI and MIP, so many ppl thought it was an extra interest charge or a late payment fee. Had a guy who didn’t realize he was being charged interest for his loan, he thought he’d just pay the principal and that was it. The stuff listed here is easy to access, but it’s far from common knowledge and I bet many ppl on this site do not know this as well.

    • minjche says:

      Perhaps there are. It’s not like there are a limited number of posts that the writers are allowed to post, so it’s really not a problem if some get posted that don’t apply to you.

    • TravelWithDignity says:

      we can always hope that Consumerist.com has a growing readership. I would love for them to be bringing in new readers and educating the public.

  2. humphrmi says:

    Really? Borrowing less lowers the payments?

  3. clippy2.0 says:

    File these under “No shit”. Too bad 20% down costs more than a new car where I live. 20% down vs 5% down (17000 vs 70000) I wonder target I’m going to aim for. Hmmmmm

    • Robofish says:

      That’s where I’m at. It’s totally unattainable for me to put 20% down on a house.

      • clippy2.0 says:

        I mean, 20% is attainable. But I think people, if house shopping in the next few years, need to be realistic about the fact that while the market had bottomed out, it will come back up. If I’m looking at saving 5-10% in the new 2-3 years vs 20% in the next 5-6 years, it just makes more sense to buy a home now while prices are still down. It still has to be affordable, but this whole “aim for 20%” thing is retarded. You should really figure out how much you can actually afford to pay each month to own a home, and use that as a benchmark; let the bank tell you whether or not you have enough credit and cash to put down on a new home. 20% alone doesn’t allow you to buy a house; being able to afford the monthly payments is.

        • huadpe says:

          I disagree pretty strongly with simply letting the monthly payments be your only guide. A low/no equity mortgage has risk associated with it well outside of not being able to make payments. It’s not a guarantee that the home won’t drop in value, even if most homes rise in value. Once underwater, it means that if you need to move for family or job reasons, you can’t without writing a big check. The bigger your downpayment, the lower the chance of being underwater, and the less underwater you’ll be if it does go to hell.

          If you buy a $350,000 house, one way or another you’re going to part with at least $350,000 before you own it outright.

          • clippy2.0 says:

            That situation can happen no matter how much equity you have in the home. If I buy the house with 20%, and put another 30% in over the next 5 years, and then find I have to sell the house, guess what, I still only have 50% into that 350! that’s still over 100 grand! I agree the less risk the better, but tossing up a bunch of what if’s just doesn’t stick. A downpayment helps to mitigate risk, but if you’re truly scared of the house going underwater, wouldn’t you be better off taking that large down payment and putting into into a high interest type savings account, and getting a certain return on it instead?

            • huadpe says:

              If you have a mortgage at 4% and a savings account at 0.8% then the guaranteed yield on the money is3.2% higher by paying down on the mortgage, unless you plan to default on the mortgage.

              • clippy2.0 says:

                How is the yield higher on the mortgage is the whole point of putting the money into something other than the house is because you think the home will go down in value? In this scenario, you would be eating the interest to mitigate risk. Again, this is an argument of large down payment vs small. If you feel like you are in a situation where you might have to walk away from the house, having that 20% in liquid assets will serve you better than into the house. That’s why I say to look at how much house you can afford to pay for, not just to save up some 20% number.

                • huadpe says:

                  Well, I’m not planning to buy til I’m closer to 40% down. In a crisis, yes, having the money as cash is helpful, but keep in mind that you will have to pay back the deficiency on the mortgage if you default, and they’re not likely to settle cheap with you if you have $100,000 sitting in a savings account, so in the long run, you’re stuck for the money, unless it’s a weird state like California where they can only go after the house.

                  • clippy2.0 says:

                    and that comes round to my first point. Full circle. Unless the 40% is something you can can quickly save up, that amount means waiting much longer. I was saying, buy a house now that you can afford, and ignore the money down rule. Sure, the market most likely will not climb back up 30% in the next decade, but it could certainly go up 5%, and that 5% is just another 20grand to be tacking onto the sale price. The change in price could very well be the change in amount of money I’d be saving up to get a larger down payment!

      • Extended-Warranty says:

        So you’re telling us that you are going to pay off this house within 30 years when 20% down is COMPLETE UNABTAINABLE?

  4. 85% Real 15% Filler says:

    Danka Captain Obvitrisco

  5. Out For Delivery says:

    Well I just bought my first house and came up with another 10 grand when I learned about all the hoops that disappear when you put 20% down.

    So yeah, it’s pretty obvious that a bigger downpayment = smaller monthly payments, but I had no idea what mortgage insurance was a few months ago…

  6. Nigerian prince looking for business partner says:

    When we bought our home, we opted for an 80/10/10 mortgage to avoid PMI. The interest rates (even on the second mortgage), were less than paying for PMI, and still cheaper overall than a VA loan.

  7. Torgonius wants an edit button says:

    Please note that an increased downpayment does not decrease your risk of a Bank of America mistaken foreclosure on your house instead of the deadbeats next door.

  8. Blueskylaw says:

    “* Avoid private mortgage insurance. Without 20 percent down, lenders will tack on an insurance fee to your monthly payment. It will stay with you until you gain enough equity and refinance.”

    Or you could just pay an estimator to inflate the value of your home thereby letting the mortgage holder break than one-fifth-of-principal threshold entitling you to be able to drop the PMI.

    • bhr says:

      That doesn’t work with purchases. Even if the appraisal comes back higher than the purchase price the lender will ALWAYS base home value on the contract price.

      Now, a year later you can refi and get rid of it, but at closing the only value the home has is the purchase price.

    • xrmb says:

      unfortunately you can’t pick the estimator anymore, the bank sends you a list of people they will accept…

  9. rpm773 says:

    Skin in the game—Twenty percent has been the norm forever. It really serves to ensure that the homebuyer has “skin in the game” and is financially viable for the homeownership responsibility.

    Heh. Except when the market is rising at silly percentages per year, and banks realize they can make a fast buck by getting people into mortgages with 10%, 5%, or perhaps even 0% down.

    Then the market crashes. The people with no equity run away, and the suckers who put 20% down in that market are left holding the bag.

    I’m glad to see we’re sticklers for principle. I’ve lost 80K-100K so that I could have a ‘skin in the game’.

  10. trencherman says:

    “It will stay with you until you gain enough equity and refinance”–not exactly correct. I have a friend who put 5% down, paid PMI, then the housing market went up (way up) and she had her house re-appraised and got rid of the PMI. This all happened within 6 months of getting her home. She did not have to refinance, she just had to prove that she had 20% equity in the home.

  11. ARP says:

    Another benefit is that you’re more likely to be able to walk away from your home without cutting a check if the market drops. In dire financial times, being able to walk away (even at a net loss), has its advantages.

    • frugalmom says:

      True, but walking away from our house without the $40K it took two years to save makes me feel a bit ill. That’s what is likely to happen when we sell in a year or two.

  12. Commenter24 says:

    20% is a bit of an arbitrary number as far as whether you’re actually ready and able to purchase a home. My wife and I just bought a new home (our first) with only 5% down. We got a great rate, a conventional mortgage, and are not worried at all about how little equity we currently have in the house. We might have been able to scrape together a full 20%, but it just seems silly to give up all that cash when we didn’t need to. Our PMI is less than $100/mo. I recognize that downpayment can be an indicator as to readiness for home ownership, but it’s certainly not the end-all-be-all measure of whether one is ready to take the plunge.

    • elephant says:

      I agree – we bought our house 3 years ago with 0% down (gasp!) – we didn’t want to sink 20% into a likely depreciating asset – we’ve got it, it’s just in various places earning interest.

      • az123 says:

        Um, your logic is a fail given the fact that you sunk money into the asset by getting a loan. You do have more cash in your pocket but that does not change the fact you loose money if your home value goes down… unless you were pre-planning to walk away, in which case they should be tossing you in jail… but sadly they cannot

        • elephant says:

          I’m making more on the $ in my other accounts than I’m paying in interest on my loan…. it’s all good – don’t worry about me – I’m not walking away.

  13. Alliance to Restore the Republic of the United States of America says:

    Who is this Phil guy anyway? A 1st grade teacher?

  14. voogru says:

    “Reasons To Save Up For A 20% Down Payment Before Buying A Home”

    0

    Because the interest rate on your mortgage is NEGATIVE when you take into account inflation. It’s like putting a 20% down payment on your house before the housing bubble popped.

    Idiotic.

    • voogru says:

      And by inflation, I mean real inflation. Not the government numbers which remove food and energy from the results.

  15. az123 says:

    The information here on PMI is wrong, PMI can be removed when your LTV (remaining loan to original loan value) is at 80%, you must ask the bank to do this and you may be denied. By federal law they must remove it when the LTV is at 78%.

    Also avoiding PMI is not as needed as it was in the past, people use to do second loans because interest was tax deductible, but PMI is now tax deductible so no reason to get higher interest second loans.

  16. dilbert69 says:

    In the Bay Area, houses frequently sell for $600K and above. Most people can’t pay rent and save $120K+.

  17. Anachronism says:

    Reasons not to put 20% down: Houses are currently a depreciating asset, and you can expect that to be the case for several more years, at least until foreclosures get back to historically normal levels, and probably for several years past that.

    Any money you throw into a house right now is money you should be prepared to never see again, so why throw more than you have to?

    Especially with rates as low as they are, where your penalty for the larger loan amount is much less.

    If you don’t throw the down payment into the house, that gives you more flexibility in the future to use that money towards mortgage payments in a tough spot, or to simply walk away from the house that you have a minimal investment in.

    Same thing goes for cars. Sure, I COULD put down money, but if they are offering me a low/no interest rate, and I know I will be upside-down in the car from day 1, why should I put a $$$ into the deal? I’d rather keep my money for the flexibility. If my life changes, I’d rather walk away and give somebody the keys to the car/house, than throw good money after bad because I feel I have too much investment at stake to do the thing that makes sense.

  18. NeverLetMeDown says:

    Reasons to put down as little as possible:

    1. Mortgage rates are tremendously low at the moment. Maximizing your ability to borrow long term at these rates is attractive.

    2. If you live in a non-recourse state, and your house declines in value, you can always just walk away (strategic default). Example: You buy a $500k house, and the value drops to $400k. If you’ve put $100k down, and walk away, you’re losing the whole $100k. If you put down $25k, then you only lose the $25k.

  19. amuro98 says:

    Median house price for single family houses where I live is back over $500,000. Median size for the houses in my area is around 1500 sq. ft.

    Who has $100,000 or more sitting around in cash?

    • Bugley says:

      “Who has $100,000 or more sitting around in cash? “

      Those who’ve saved $1600/month for 5 years.
      (If $1600/mo is unaffordable, then so is a $400,000 mortgage, right?)

    • Extended-Warranty says:

      So for a $500,000 house with 5% down and a 4% 30-year mortgage, you can afford $816,380.16?

  20. Rick Sphinx says:

    To budget for a home, use a mortgage calculator, then add 30% per month to cover all the other stuff from insurance, utilities, repairs and maintanance. If you can afford that, then your probably good.

  21. PaulR says:

    20% of how much, compared to your income, compared to your cash flow?

    So, you’re better off paying 20% down on a $1M home with income of $100K/year, than 10% down on a $125K home on $60K/year? Really?

    Rules of thumb aren’t rules.