The Unexpected Benefits of Putting 20% Down
Buying a house has become one of the more challenging financial feats to accomplish these days. Rising home prices and seemingly ever-increasing interest rates have combined to form a significant obstacle for homebuyers. As a result, many of these folks are tempted to reduce the amount they put down on their initial purchase.
But while buying a house may be more difficult than in years past, putting at least 20% down on your home is still a great idea and comes with several not-so-obvious benefits. Let’s talk about what those benefits are.
1. It strengthens your offer.
The benefits begin even before you close on your new home. Because the homebuying market is so competitive, sellers scrutinize the offers they receive in detail. They want to know that the potential buyer of their home has the best chance of getting to the closing table successfully. One of the best indicators of that is the size of the downpayment.
A downpayment of at least 20% demonstrates your strength as a buyer, showing that you have the financial wherewithal to navigate the many potential pitfalls between contract and closing. These may include appraisal issues, unexpected repairs, surprise credit issues, or even interest rate buydowns.
As a real estate broker of nearly a decade, I can assure you one of the first factors agents and sellers look at in evaluating an offer is the size of the proposed downpayment. Twenty percent signals that you are a well-heeled buyer, financially prepared to do what it takes to close on the home, and will give your offer a leg up against competing purchasers. That’s a big deal.
2. It eliminates PMI.
PMI stands for "private mortgage insurance." Nobody likes paying insurance, but this version is worse than usual – it protects the lender and provides zero benefits to you as the homeowner. And it’s not cheap. NerdWallet reports that it can run as high as .46 to 1.5% of the original yearly loan amount. That is hundreds of dollars per month for most folks. So, why would anyone pay for it? Well, because they have to. PMI is required on all FHA and conventional loans with less than an 80/20 loan-to-value ratio. But savvy homebuyers can avoid it entirely by putting at least 20% down on their initial purchase. This one move can save you tens of thousands of dollars over the life of your loan. It also preserves that cash to help you pay the loan even faster.
3. It reduces stress.
The most significant benefit of putting at least 20% down on a home is the one that folks probably talk about the least. This is simply the reduced stress that substantial equity provides. Your home should add stability and security to your life – not stress and worry.
It’s a simple equation, but the bottom line is that the larger the downpayment on your home, the smaller your overall mortgage and corresponding monthly payment will be. Many lenders will also offer a lower interest rate to those with a larger downpayment.
All of this contributes to a more manageable house payment and better opportunities to pay off your mortgage more quickly. This will reduce the interest you pay overall and allow more of your resources to be devoted to building wealth otherwise.
4. It protects you in a down market.
While home values have risen consistently for most of American history, there have been brief pullback periods (see 2008). This downturn, unfortunately, ravaged many homeowners with thin equity. You don’t want a dip in value or a hiccup in the market to leave you underwater and under financial pressure. An equity cushion prevents this situation.
It also ensures that if you need to sell your house in a pinch, you’ll have the margin to do so. In the wake of the 2008 crisis, many homeowners got stuck in their homes when values dipped. It’s hard to sell something, especially your home when you owe more than it’s worth. But putting 20% down helps prevent this scenario and ensures your home will remain a blessing and never become an albatross around your neck.
Let’s not make any bones about it. Putting 20% down is a tall order in this housing market. It may require you as a homebuyer to save a bit longer or trim your purchase budget. However, doing so will allow you to enter the market from a powerful position, enabling your home to contribute to your financial well-being rather than detracting from it. Owning a home is a long-term game, and the benefits will accrue for many years to come.
About the author: Jordan Hall is a (reformed) attorney, real estate broker, and entrepreneur. He wrote the book, Every Degree Debt Free, about his experiences paying for law school without loans. Today, he no longer practices law but helps folks build wealth so that they can live their purpose and leave a legacy. He is also a French fry connoisseur.