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Mortgage Loans

6 Reasons to Make a 20% Down Payment

A mortgage program that only requires 3% to 5% down can make a home purchase possible for those who aren’t in a position to put down 20%.  

But, what if you have enough in savings for a 20% down payment? Should you spend this much on a purchase?

By no means should you drain your life savings to buy a home. But assuming you’ve saved enough for a sizable down payment, and you’ll have cash left in reserves after buying the house, a 20% down payment has its benefits.

1. Protect yourself from declines in home values

In a perfect scenario, homes would appreciate, or at the very least, hold their value. But sometimes, property values decline causing many homeowners to lose equity. And unfortunately, a low down payment or no down payment might not be enough to protect yourself against these declines. 

Depending on how much your property value decreases, you could end up with negative equity or an upside-down loan. This is when you owe more than your home is worth. On the other hand, the more you put down when buying a house, the more likely you are to maintain equity if your home value decreases.

2. Avoid PMI

One of the biggest benefits of a 20% down payment is that you don’t have to pay private mortgage insurance (PMI). 

PMI is required on most home loans without 20% down. When borrowers put down less cash, their loans can pose a greater risk to lenders. PMI, therefore, protects lenders in the event of default. 

The problem with private mortgage insurance is that it’s included with the monthly mortgage payment. This can increase your monthly housing expense by $100 or more, and PMI typically isn’t waived until the home has at least 20% equity. 

In the case of an FHA home loan, mortgage insurance is for life if you're putting down less than 10 percent. So, you would need to refinance an FHA loan to get rid of this expense in this circumstance.

3. Lower your mortgage payment

You’ll also enjoy a lower mortgage payment with 20% down. Not only because you’re financing a smaller amount, but also because you’re avoiding the expense of PMI. This can increase your disposable income, which can go toward recouping your savings account.

4. Qualify for a better interest rate

Different factors determine your mortgage interest rate. Typically, you’ll pay a higher rate if you’re a high-risk applicant. This includes having a high debt ratio, putting down a small down payment or no down payment, and/or having an imperfect credit history. 

On the other hand, a good credit score and a higher down payment can help you qualify for a better rate. A low rate reduces how much you pay in interest over the life of the mortgage. Plus, a lower rate can reduce your monthly mortgage payment.

5. Compensates for a higher credit risk

If you earn enough income to get a mortgage, but you have a low credit score, buying a home with a 20% down payment could improve your approval odds. 

The more you put down on a property, the greater your stake in the home. Homebuyers who invest more of their own cash in a purchase are less likely to default, which builds a lender’s confidence.

6. Pay off the mortgage faster

A 20% down payment also comes in handy when you want to pay off your home loan sooner. Taking out a 15-year mortgage is one strategy to accelerate your payoff schedule. But the payment for a 15-year mortgage – with a low down payment - might be more than you want to spend each month. 

If you were to put down 20%, however, this could make the payment for a 15-year mortgage more manageable. This can help you to pay off the home sooner and build additional equity faster.

Cherry Creek Mortgage offers various mortgage products for all types of buyers — first-time homebuyers, repeat buyers, military, and more. Contact us today and one of our experienced loan experts can help you find a loan that’s tailored to your needs.