We are going to put the misconceptions aside and say it point blank, you do not need 20% for a down payment on a home. The term “down payment” is something that many new homebuyers fear and why many wait so long to buy their first home. The fact is, loans such as VA and FHA naturally have low down payment options aimed at making it easier for buyers. At America’s Moneyline, we have put together a list of pros and cons you may be able to avoid.
PRO of not putting down 20%
The less time you wait to buy, the sooner you can call a house your home. If interest rates rise and values continue to rise in your desired areas, buying a home sooner rather than later could be your best move.
CON You’ll likely need to pay for private mortgage insurance (PMI)
If you make a down payment below 20%, most lenders will require you to pay PMI. PMI essentially safeguards your lender in case the loan defaults.
PRO Avoid your rising rent prices
If you are having a hard time saving 20% and rent prices are on the rise, a low down payment option may just be what you need. The pro is that you can start building equity faster in your home instead of putting cash in your landlords pocket.
CON It will take longer to build home equity
With less equity in a home to start with, it will take longer to remove your PMI and you will not have an option for a cash-out refinance for a few terms.
PRO Keeping more cash in your pocket
Many homeowners, in their first year of homeownership, face a lot of expenses including improvements, repairs and unforeseen house emergencies. If an issue does arise, by putting less cash down, you will have more money in the bank to use for an emergency.
CON There are risks if home prices fall
If the market value of your home drops, there is a chance that you can end up owing more on your house than it’s worth. This term is called “negative equity” and it is also referred to as “being underwater”. This situation could happen if you make a really small down payment.
At America’s Moneyline, we are not only here to advise you but also to help educate you on how to make a smart financial decision. Our team of trusted loan advisors will help guide you through any of the steps needed in buying your home. We would be more than happy to help you weigh the pros and cons of a 20% downpayment.