If you’re a home buyer, you may be wondering what the ideal house down payment is. Most people are familiar with the 20% down payment rule, and some lenders or home sellers even require it. 20% can be daunting for many buyers on a tight budget. Is it even necessary? Learn the pros and cons of a 20% down payment.
Pros of a 20% Down Payment
For starters, you can avoid buying the mandatory private mortgage insurance (PMI) if you put 20% down. This insurance is the lender’s safety net in the event the buyer defaults on the mortgage. In addition, lenders will also view you as less of a risk and lower your interest rate. An interest reduction of just one or two points can save you upwards of thousands of dollars over the life of the mortgage.
Home sellers also typically prefer to negotiate with buyers that can put down a 20% down payment. It’s a good sign that your finances are in good shape. This can really prove advantageous in a seller’s market where the seller tends to have more negotiating power.
Cons of a 20% Down Payment
A large down payment can prove to be financially risky. It may mean less money to invest in an emergency fund. Ask yourself this: if after footing the 20% down payment, will I have enough money for an unforeseen expense, such as a major car repair or plumbing repair? If not, it might be best to settle for a smaller down payment and have a bit more money in savings.
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