Even if you’ve never bought a home before, you’re probably aware of the gold standard for paying for one: a 20 percent down payment. That’s a big chunk of change. In an era of “no money down” promotions, does the traditional wisdom still hold true — and is 20 percent down the right move for your own finances?
A down payment is the cash payment you make on your home up front. For example, if you buy a home for $100,000 and pay 20 percent down, you’ll write a check for $20,000 and then pay off the remaining $80,000 as your mortgage loan.
There are plenty of pros to playing it safe with a 20 percent down payment, but there are advantages of paying less up front as well. What works best for your financial goals?
Pros of a big down payment
The bigger your down payment, the smaller your mortgage loan. A smaller loan means not only less money to pay back over the years but less interest to accrue, as well. You save big over the long run.
A bigger down payment means smaller monthly payments, too. Because your mortgage is covering a smaller total, your monthly payments are smaller as well. That’s more cash in your wallet on a month-to-month basis.
Meeting that 20 percent down payment will exclude you from private mortgage insurance (PMI). This is an extra cost that is typically added to your monthly payment if you have less than 20% equity in your home. These payments don’t last for the entirety of the loan; you can petition your lender to have them removed once you’ve acquired the necessary amount of equity.
Convert your smaller loan and smaller monthly payments to a shorter loan term. Taking out a loan for less money means you may be able to pay it back more quickly. If you can pay off your mortgage early in terms of principal prepayments or choosing a shorter termed loan, you’ll save a significant amount of money.
Big down payments tend to lead to better mortgage terms from your lender. The more money you put up at the outset, the lower the interest rate your lender may be able to offer for your mortgage.
A sizeable down payment gives you instant equity. Equity is the amount of your home’s value you “own” free and clear. When you have equity in your home, you have access to home equity loans and home equity lines of credit that let you use the value of your home to secure loans for important things like paying for college or a big remodeling project.
Cons of a big down payment
Ready to get started right now? A smaller down payment gets you into the home you want while protecting your cash on hand for other financial needs, as well.
If you need a place to live sooner rather than later, making a smaller down payment can get you in now. In markets where rental living isn’t practical, a low-down payment home purchase can be a real lifesaver. You won’t have to spend so long saving such a significant amount of cash.
Smaller down payments keep you from tying up most of your available funds in the value of your home. If you’d rather keep more cash on hand or be able to diversify where your savings goes, you may want to avoid dumping a huge lump of cash into a down payment on a home.
A down payment can decimate your savings. If you would be putting most of your cash into your down payment, a smaller down payment helps you keep more cash on hand for emergencies.
If you don’t have a traditional down payment
Big down payments have traditionally served as a way mortgage lenders to ensure they’ll reasonably be able to recoup their losses if a first-time buyer folds on their loan. Fortunately, first-time buyers who don’t have the kind of cash for a traditional down payment now have other options. If you haven’t owned a home in the last three years, PenFed’s First-Time Homebuyers Program can help you get into your first home for less.
The PenFed First-Time Homebuyers program lets you buy a home with small down payment. Short on cash for closing? Combine this plan with PenFed’s Real Estate Rewards to save on the origination fee if you use a network real estate agent and an affiliate title provider. Now you can buy your first home without draining your savings.
A First-Time Homebuyers loan can help you kick off a standard fixed mortgage; adjustable rate mortgages (ARMs), jumbo and high-balance mortgages, and balloon mortgages are not eligible. You could use a First-Time Homebuyers loan to purchase a house or townhouse; condominiums are not eligible.