5 reasons you should make at least a 20% down payment on your new home

October 16, 2014

Ready to buy a house? Find out why it's important to make a 20% down payment on your new home.

5 reasons you should make at least a 20% down payment on your new home

While it may be tempting to pay less than 20% of your mortgage as a down payment, the immediate savings don't justify the ultimate costs.

  • In fact, a 20% payment actually puts you into a stronger position in the long term for home ownership rather than paying less. Here are a few reasons why.

1. You'll be more likely to get that mortgage

When you make an offer on a home, one of the first things you'll have to do is demonstrate that you're capable of making your mortgage payments.

Over time, banks have come to realize that buyers who can't pay a 20% down payment are less likely to be able to make their monthly mortgage payments.

  • By putting 20% down up front, the bank will have more faith that you can afford the house you're after, and you'll be more likely to get the mortgage.

2. The mortgage payments you make will be lower

The temptation to pay less than 20% usually comes from a desire to save money. But if you really want to keep more cash in the bank, you should make a larger payment up front. The reason is simple:

  • The more money you put down up front, the less you'll have to borrow. That means a smaller mortgage and lower monthly payments.

3. A lower mortgage also means smaller interest payments

The interest on your mortgage can be an insidious thing. Making a small down payment on a home might seem like a good idea, until you realize that you're getting charged interest on the loan you took out to cover the rest of that mortgage. The amount of that interest increases with the size of the loan.

  • Paying more up front means paying less interest down the line.

4. Your new home will instantly have equity

Having equity in your home helps to protect you if the market takes a turn for the worst, and a 20% down payment gives you that equity instantly.

  • It's a safeguard that protects your home, yourself and your family.

5. You'll pay off your mortgage sooner

This may sound obvious, but too many people don't factor it into their considerations while trying to determine how much money they can put down on a house.

  • By paying more up front and having smaller mortgage payments, you give yourself the freedom to put a little extra money each month toward the total debt. Do that often enough over the lifetime of the mortgage and you may find yourself paying it off earlier than expected.

Bonus tips: how to save money for that 20% down payment

Now that you've decided to put 20% down, how do you get there? Here are a few simple ways to save money for that down payment:

  • Reduce major monthly expenses by shopping around for lower insurance rates, less expensive cell phone plans, and other ways to save on recurring bills
  • Monitor your spending online to see where you can save money
  • Find temporary part-time work
  • Refinance your debts
  • Reduce your student loan payments

By carefully analyzing your current budget and expenditures, you may find ways to save the money you need to make that 20% down payment on a house. While it may seem like a big expense up front, in the long run you'll reap the benefits.

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