It's often repeated, but is it true?

Do You Need 20% Down to Buy a House?

You’re thinking of buying a house, but you’ve been told you need to save 20 percent of the purchase price first for your down payment. With today’s housing prices, that would mean saving up tens of thousands of dollars before you could even consider buying a home.

It’s daunting. But is it really true?

Do you need to put 20 percent down to buy a house?

The short answer is no. In some cases, you can buy a home with no money down. And many homebuyers who have good credit can purchase homes with a down payment of 3, 5 or 10 percent.

In this blog, I explain what you need to know about down payments and look at the pros and cons of putting 20 percent down.

The Benefits of a 20 Percent Down Payment

A 20 percent down payment. That is the holy grail that many financial advisors—and dads everywhere–will tell you that you need to buy a home. But why?

There are some benefits to putting 20 percent down.

First, you may get a lower interest rate on your mortgage loan. The larger your down payment, the less risk there is for the lender. So paying 20 percent or more of the purchase price up front in cash may get you a better interest rate. Even small changes in interest rates can add up over the life of the loan.

Second, the larger your down payment, the smaller your monthly mortgage payment. That makes sense, right. The more cash you can put down on your house, the less you have to finance with a mortgage loan.

Another benefit of a 20 percent down payment is that almost all lenders require borrowers who put down less than 20 percent to buy private mortgage insurance (PMI) to protect the lender’s investment. The cost of mortgage insurance is typically between one-half and 2 percent of the loan amount, and it is added on top of your mortgage payment each month.

For example, if you were purchasing a $350,000 home with 10 percent down ($35,000) and you had a 30-year mortgage at 6 percent, you PMI would add around $150 to your monthly mortgage bill.

That’s $150 a month you could spend on something else.

And finally, having a 20 percent down payment can make for a stronger offer when you do find a home you love. For sellers who receive more than one offer, the buyers’ financial position can make a difference in which offer to accept.

So there are benefits to having a 20 percent down payment. But, you don’t have to put 20 percent down, and there are some advantages to buying a home a smaller down payment.

The Advantages to a Smaller Down Payment

House made of money illustrating home equity

The biggest benefit to a smaller down payment is that you can probably buy a home sooner. And that means you can also start building equity in your home sooner.

Let’s go back to that $350,000 home. By the way, that is the median price of a single family home here in the Twin Cities right now.

To buy that $350,000 home with a 20 percent down payment, you would need to save up $70,000. That is a lot of money for most people. But what if you were to put just 3.5 percent down, you would need $12,250. For many people, that is a much more manageable amount.

You would be paying more on a monthly basis, both in terms of your principal and interest payment, and you would have to pay PMI. But the good news here is that once you have 20 percent equity in your home, either because your home’s value has increase or you have paid off 20 percent of the principal of your loan, you can request your lender remove the PMI. It is not a forever thing.

For some buyers, another benefit of having a smaller down payment is that they can keep some of their savings for other things, home improvements, family emergencies, or as a financial safety net.

And if you’re renting right now, the benefit of buying a home with a smaller down payment is that you will no longer be paying rent. Your monthly mortgage payment will go toward building equity in something you own.

What Percentage of Buyers Put 20% Down on a Home?

So how many buyers actually put 20 percent down when buying a home? According to the National Association of Realtors annual survey of homebuyers, 56 percent of homebuyers put 20 percent or more down, but that means that 44 percent of homebuyers are purchasing a home with less than 20 percent down.

Before you make any decisions that would affect your financial future, speak with a qualified lender.

And if you’re interested in learning about how you could get up to $17,000 in down payment assistance, check out my next blog where I talk about down payment assistance programs for Minnesota homebuyers.

Just getting started in your home buying journey? Check out my video, 5 Things to Ask Before You Choose a Realtor.

Before you buy a home, make sure to check out my video 5 Mistakes to Avoid When Buying a Home in Minneapolis.

J Trout Lowen is a Minneapolis Realtor and an expert at helping homebuyers and sellers navigate the Twin Cities housing market.

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