Many first time home buyers believe they must put 20 percent down on a home. But that is far from the truth! In 2019, NAR found that the average down payment on a house or condo was just 12 percent1. For first-time buyers, that number drops to six percent, and many put down much less. Down payments are flexible and there are an array of options that could be available to you. Below are a few things to consider as you put together your home buying budget.
Where did the 20% Myth Come From?
You may be wondering why so many people think 20 percent is the minimum down payment, and why anyone would want to put 20 percent down when there are many available rate options for less. That is because paying 20 percent allows you to avoid paying mortgage insurance. But there are benefits to paying mortgage insurance if it puts you in a home sooner.
Mortgage Insurance Basics
Mortgage insurance (MI) makes it possible to put down a smaller down payment, less than 20 percent, and still qualify for a home loan. This protects the lender from any potential loss in case you were to default on the loan. Here are the 2 most common types of Private Mortgage Insurance (PMI) to keep in mind if you decide to put down less than 20 percent.
Borrower Paid (BPMI)
- Most common type of mortgage insurance.
- Will show as a monthly fee that you pay with your mortgage payment.
Lender Paid (LPMI)
- Your lender will pay for the insurance up front and pass the cost on to you in the form of a slightly higher interest rate for the life of the loan.
- Refinancing is the only way to lower your monthly payment as the interest rate will not decrease once you have reached 20 or 22 percent equity as it would with BPMI.
Pros and Cons of Your Down Payment Size
Keep in mind there are both benefits and disadvantages to both a big or smaller down payment. Take a look at your finances and home buying goals to figure out the right down payment size for you. These are things to consider as you form your home buying budget and advance on your path for a place to call home:
- Bigger Down Payment = Lower Interest Rate
- Bigger Down Payment = Lower Monthly Payment
- Smaller Down Payment = Stop Paying Rent, Buy A Home Sooner
- Smaller Down Payment = Start Building Equity Faster