A familiar misunderstanding among homebuyers is that they must come up with 20 percent of the sale price for a down payment. A recent survey by Lending Tree shows that over half of those surveyed noted the ability to afford a down payment as the biggest hurdle.
Freddie Mac states “The most damaging down payment myth since it stops the homebuying process before it can start is the belief that 20 percent is necessary.”
According to the Profile of Home Buyers and Sellers from the National Association of REALTORS® (NAR), the median down payment hasn’t been over 20 percent since 2005. Today’s average down payment is only 12 percent and that number is even lower for first-time homebuyers, who average a 7 percent down payment.
It’s true that if you’re able to put 20 percent down on a new home, you will gain a few key benefits, such as no PMI (Private Mortgage Insurance). PMI is insurance that protects your lender if you default on your mortgage loan. However, even if you don’t put down 20 percent, you can request that your lender remove PMI once you’ve reached 20 percent equity in your home.
The larger the down payment, the better the interest rate. The higher your down payment, the less of a risk you are to lenders. If you’re able to put down at least 20 percent on your mortgage, you’ll have access to lower interest rates. An interest rate difference of even one or two points lower can save thousands of dollars throughout your loan.
On the other hand, once you put money down on your mortgage, it’s not easy to get it back. If there’s a chance you might need the money later, it may be wise to put down less and build your emergency fund. New homebuyer’s often found there are still repairs and updates needed for their home after the purchase, and the larger your down payment, the less money you’ll have to complete them.
For a lot of people, saving for a down payment can take months, years, or even decades. Waiting until you have a 20 percent down payment can lead to a huge opportunity cost when you factor in what it costs each month to rent. While you wait and save, home values are appreciated, and you lose out.
Right now, mortgage rates are still at historic lows. A big benefit of buying a home now is several programs allow home buyers to purchase a new home with zero money down or as little as 3 percent down, and you know that your mortgage rate will still be low.
Don’t let the myth of the 20 percent down payment put an end to your homebuying process before you even begin. If you want to purchase a home this year, reach out to a trusted real estate professional to start the conversation and explore your options.
The Platinum Group, REALTORS® are ranked as the number one independent real estate firm in Colorado Springs and delivers years of experience and resources to help their clients achieve the best possible results for their families.