Why 20 Percent Down is the Way to Go
There is no doubt, buying a new home is one of the most exciting times in anyone's life. It is something that we all hope to do at one point in our lives, and is often considered to be the essence of the American dream. However, saving to pay down payments and upfront costs is one of the greatest challenges you are likely to encounter. That is why choosing the home mortgage strategy that is right for you is just as important as selecting a house. But how much exactly do you need to save for a down payment?
It seems that the most common is 20% of the total amount required to buy the house. Often times there are other lower rate, between 3-10% offered in the market. It is expected that the lower rates would be the better option, but surprisingly, 20% is recommended.
Here are some of the reasons why a 20% down payment is the way to go when buying a house.
Higher Chances of Getting the Home Mortgage
By putting down the initial 20% you not only avoid paying the private mortgage insurance (PMI) that most lenders will require you pay, but you will also lower your monthly mortgage payments significantly and eventually save money over the lifetime of the loan. A 20% down payment is a much lower risk loan for a bank to issue. For that reason, the chances of you qualifying for a mortgage or a home refinance loan are higher if you pay 20% down compared to when you pay 3,5 or 10% down payment. The PMI is usually required by lenders to protect themselves if the buyer defaults or anything else comes up preventing them from paying the correct amounts on time.
Less Cost and Equity Building
When is down payment less than 20% is made, most banks will require that you pay mortgage insurance. This is know as PMI and is charged on a monthly basis in case the mortgage were to default. For this reason, placing 20% down from the beginning will save you money in the long run and lower your monthly payment to the bank.
Instant Equity for Remodeling
The lower the down payment, the lower the equity you will have once you move into your new house. Equity is the amount of home that YOU own. If remodeling or repairs are needed, you can use the equity in your home to pay for renovations to make that house exactly what you want. 3,5, and 10 percent down payment will leave you owning less of your home and less money for remodeling and repairs.
In conclusion, there are several reasons why saving up for a 20% down payment on your home makes sense. It will increase your chances of a bank doing business with you due to the lower risk you will be to that bank. It will decrease your overall costs by removing the necessity for a monthly PMI payment. It will also grant you instant equity that can be used for remodeling and repairs so that you can make it the home of your dreams. Happy Saving!
Please visit Citizens Bank to get more information on home refinance loans as well as how to get home mortgages.