Buying a home is a big financial deal — not the least of which is coming up with a 20% down payment, the percentage often recommended you put down in order to qualify for better mortgage terms.
But saving up such a hefty amount can be a challenge — which might be why the majority of would-be homebuyers end up putting down a lot less, according to the latest figures from the National Association of Realtors (NAR). The organization found that among first-time homebuyers who closed on homes between April and June 2017, 73% put down less than 20%. Among all home buyers who closed last month, 53% put down less than that recommended amount.
Even more surprising: 61% of first-time homebuyers had a down payment of 6% or less.
While it is possible to put down less than 20% in order to buy a home, there are good reasons why financial and housing pros often recommend you hit this threshold, including ...
You avoid having to pay private mortgage insurance. Mortgages with down payments smaller than 20% are viewed as more risky for lenders to take on. So to make up for that risk, lenders may charge private mortgage insurance, or PMI, which gets tacked onto your monthly mortgage payment.
You'll likely pay less on your mortgage in the long run. In addition to helping you avoid PMI, a larger down payment helps you lower your future monthly mortgage payments and improves the chances that you'll get a better interest rate — which ultimately means you pay less over the life of your loan. In fact, Zillow calculated that on a $300,000 home with a 30-year, 4.25% interest rate mortgage, you'd save more than $54,000 over the life of the loan if you put down 20% instead of 5%.
You're building equity in your home faster. Think about it: Wouldn't you rather own 20% of your home when you sign on the dotted line, as opposed to just 6%? The more equity you own in your home, the more protected you are if the value of your home goes down during volatile markets. With a small down payment, you run the risk of owing more than your home is worth if your home drops a lot in value, as happened to many home owners during the recession.
Of course, only you can decide when the time is right to become a homeowner, but it's important to remember that this is one of the biggest purchases you'll likely make in your lifetime. So before you commit to a mortgage, take your potential house payments on a test run to make sure they fit into your budget, then ask yourself these key questions to make sure you're ready for the responsibilities of home ownership.