If you’ve bought a home before, or if you’re looking to buy a home now, you’ve probably come across the “20% rule”. This is a rule stating that you should pay at least 20% of a home’s sale price upon purchase, leaving the rest to financing.
It has existed for decades and, for the majority of cases, was a solid rule to follow.
However, as of late, the 20% rule is being preached less and less. In fact, these days, many buyers are purchasing homes with little or no downpayment at all.
So, does that mean that the 20% down payment on a house rule is over? The truth is that it’s complicated. That’s why we’re going to get into some specifics below.
Benefits of a 20% Down Payment
There are several benefits to making a 20% down payment, such as:
Allows You to Avoid Private Mortgage Insurance
Perhaps the biggest benefit of paying 20% down on your house is that you’ll avoid private mortgage insurance or PMI.
Private mortgage insurance is tacked onto any mortgage that’s not accompanied by a down payment of at least 20%. This insurance is generally 0.5% to 1.0% of the home’s total sale price on an annual basis. Therefore, if your loan equals $150,000, you could have to pay up to $1,500 a year in PMI.
However, by putting down 20% at the beginning of the purchase, you won’t have to pay PMI at all. This will allow you to save anywhere from $80 to $150 a month.
Results in a Lower Interest Rate
When a lender gives a buyer a mortgage, that lender must assess the amount of risk that it’s subjecting itself to. To assess this risk, the lender considers a few different factors. The most pertinent of these factors include the buyer’s credit score, the buyer’s income, and the buyer’s down payment.
The greater these entities, the safer the lender feels in giving out the loan. As such, the lender will reduce the interest rate associated with the loan.
So, in essence, by putting down at least 20%, you are reducing your interest rate substantially. Your lender sees your 20% downpayment as a substantial investment and feels safe providing you with a low-interest loan.
Lowers the Amount You Pay Long-term
Simply put, the more you put down upfront, the less you’ll have to pay in the long-term. Why? Because the smaller the loan you obtain, the less interest you’ll accrue over the years.
Let’s say that you put down 10% as opposed to 20%. Instead of having interest accrue on 80% of the sale price, you’ll have interest accrue on 90% of the sale price. This will not only substantially increase your monthly payment, but the total amount you pay in the long-run.
Helps Your Offer Stand Out Among Others
If the home you’re looking to buy is being pursued by several potential buyers, you’re going to have to beat out the others. Often times, a 20% downpayment is just what you need to assert your dominance. Not only does a 20% downpayment lessen the amount of money you need in the financing, but it also shows that you’re capable of making payments over time.
Now, this isn’t to say that a 20% downpayment is all you need to beat out the competition. A superior income and credit score can make a difference as well. However, all other things being equal, it will likely provide you with the push you need.
When Should Your Down Payment Be Less Than 20%?
While a 20% down payment can be beneficial, there are plenty of occasions in which it can (and should) be foregone.
For instance, if you’ll have to save for years in order to accumulate a 20% down payment, you should probably just put down less and be done with it. After all, you could take years to save up $50,000 for a $250,000 house, only to find that the value of such a house has increased by tens of thousands of dollars. All the while, you could have been building equity on a home that you own.
Another reason to pay less is that you know you’ll never be able to save 20%. If your income only allows you to accumulate very little in savings, you’re better off finding a low or 0% down mortgage now. While you’ll pay higher in interest, you’ll, at the very least, be able to avoid further increases in value.
What is the Median Down Payment on a House?
While 20% in down payments is beneficial, it’s not exactly necessary. In fact, these days, the vast majority of home buyers put down less than 20%.
The median downpayment in 2018? A measly 5.37%; That’s $15,490 on a house priced at $270,000. This just goes to show that you can buy a house with fairly limited savings.
How Big of a Down Payment is Required?
Now that we’ve got that out of the way, you might be wondering: do you need to make a down payment at all? That depends on the type of mortgage that you’re trying to obtain.
There are many different types of mortgages, each of which has a different minimum down payment requirement. The good thing is that, regardless of your available savings, there is an appropriate loan available to you.
For instance, two of these mortgages don’t require down payments at all. These include USDA loans and VA loans. USDA loans are given for houses in rural areas while VA loans are given to military veterans.
Conventional loans can vary, generally requiring a minimum down payment of either 3% or 5%. These loans have no geographical restrictions.
If you have a lower-the-average credit score, you might be able to secure an FHA loan. These government-sponsored loans require a down payment of just 3.5%.
If you’re buying a particularly expensive home, you’ll have to opt for a jumbo loan. These require a minimum down payment of 10%.
Looking to Obtain a Mortgage?
As you can see, while the 20% down payment on a house rule is still a good one to follow, it shouldn’t necessarily dominate your buying decisions. There are plenty of reasons to put down a lesser initial payment, especially if you’re deadset on buying a house.
Looking to buy a house now? Hoping to obtain a mortgage? If so, we here at Robus Mortgage are the people to see.
Contact us today for a free quote!