Many of us have heard when buying a home that it is best to put down 20% of the home’s price. While this is not possible for everyone, if you can do it there are huge benefits. Here are the top 3 benefits to putting down a 20% down payment when buying a home:
1. The Evil Mortgage Insurance- Some of us have heard that Mortgage Insurance is EVIL. It’s not really evil as it is something that is required when you are putting down less than a 20% down payment when getting a conventional loan. Mortgage insurance is insurance for the lender incase you are foreclosed on, it helps them recoup some of the money they lose. But with a 20% down payment you can avoid mortgage insurance, saving you money each month on your mortgage payment. On a 200,000 loan amount and a 5% down payment(740+ credit score) the mortgage insurance alone could be $98 a month.
2. Escrow Account- An Escrow Account is an account that your mortgage lender holds to collect the taxes and insurance for the home. At the end of the year they pay the tax and insurance bill for you. In your monthly mortgage payment is 1/12th of your yearly tax and insurance bill. It really depends on your preference if you want an escrow account but without a 20% down payment you would be required to have an escrow account.
3. Lower Mortgage Payment- Obviously a 20% down payment can help you get a lower payment based on #1. But keep in mind with a 20% down payment you are borrowing less money vs a higher loan amount, so your payment will be lower. Yep, this seems obvious but it is good to keep in mind.
A 20% down payment is not possible for everyone, but if you can afford it there are 3 major benefits to it.