Do You Know The Pros And Cons Of Putting 20% Down?

In order to see how a large down payment can offset other expenses and payments, let's take a look at the pros and cons of putting 20% down on the purchase of a home in Madison.

The pros

It is widely accepted that a 20% down payment is the ideal amount for most loan types and lenders. You'll reap several benefits if you can afford to put 20% down on your home.

PMI is not required

In order to avoid private mortgage insurance (PMI), you will need to put 20% down. PMI protects your lender in the event you default on your mortgage.

Once you reach 20% equity in your home, you can request that your lender remove PMI, even if you don't put 20% down.

Two ways to gain equity in your home are as follows:

  1. An increase in the value of your home
  2. Through your monthly mortgage payments, you can pay off your mortgage principal

When you've built at least 22% equity in your home, lenders automatically cancel PMI.

Rates that are better

For borrowing money, your lender charges you an interest rate based on the principal of your mortgage.

Putting down at least 20% on your mortgage at closing can allow you to receive a lower interest rate. If you’re able to put down at least 20%, lenders will be less concerned with you. During the course of your loan, just a one or two-point drop in interest can save you thousands of dollars.

Payments that are lower each month

When you make a larger down payment, you won't have to borrow as much money for your mortgage loan. With less borrowing, your monthly mortgage payments will be smaller. This makes it easier for you to budget for repairs or other expenses.

Advantages over other buyers

You may find it easier to find a mortgage lender if you have a 20% down payment. More down payments indicate that your finances are in order, so you might have fewer problems finding one. If the house you want is in a hot market, this can give you an advantage.

Cons of putting down 20%

When it comes to how much down payment you need to buy a house, consider the disadvantages of putting 20% down. Some buyers simply cannot afford it. Others prefer to keep some money aside for future repairs.

A greater risk of financial loss

If you think that you might need the money for something important in the future, it may be wise to put down less and build an emergency fund instead.

Repairs and other items are less expensive

In some cases, homes that require only minor repairs can be a bargain for new buyers. However, the larger your down payment, the less money you'll have left over to spend on repairs and maintenance.

Save for a longer period of time

When you factor in what you'd spend on rent if you wait until you have a 20% down payment, you can incur a significant opportunity cost. For most people, saving for a down payment can take months, years, or even decades. If you save up for a 20% down payment while buying a home, it may be more affordable in the long run than paying rent while you save.

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