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By Michael Corbett | Real Estate Pro in Los Angeles, CA

Seven Reasons To Put 20 Percent Down

What exactly is the down payment? It’s the amount of money that you, the buyer, kick in out of your own pocket, right at the start, toward the purchase of the house. But exactly how much do you need to put down?

Here’s my feeling about this: always try to put 20 percent down. Period. I’ve been recommending 20 percent forever—since long before the market had its recent huge downward swing. But as so many people fell prey to the idea of putting less than 20 percent down in recent times, we have to talk about this because it’s a big deal and something I feel very strongly about.

Seven Reasons to Put 20 Percent Down
  1. Improved chance that you will get the mortgage—The first and biggest reason to come up with 20 percent down is that in today’s new market, many banks won’t give you a mortgage unless you come up with at least that much. The loan programs that once existed for 10, 5, and 0 percent down are not just not available.
  2. Skin in the game—Twenty percent has been the norm forever. It really serves to ensure that the homebuyer has “skin in the game” and is financially viable for the homeownership responsibility.
  3. Smaller monthly mortgage payment—More money down means you borrow less, which means you will have a smaller mortgage, which means you will have a smaller, more affordable mortgage payment.
  4. Lower interest rate—The interest charged on a loan with 20 percent down is often lower than the interest on a loan with less money down. Your lower interest rate will save you thousands if not tens of thousands of dollars over the life of the loan.
  5. No private mortgage insurance (PMI)—Putting 20 percent down allows you to avoid private mortgage insurance. Also called lender’s mortgage insurance, PMI is extra insurance that lenders require from most homebuyers who obtain loans in which the down payment is less than 20 percent of the sales price or appraised value. Many lenders will even add a percentage that is like an insurance policy onto the mortgage interest rate.
  6. Instant equity building—A significant down payment builds instant equity in your home. A 20 percent down payment immediately puts equity into a property when you purchase it. That down payment safeguards you if the market turns downward temporarily.
  7. Great saving skills—Saving for a full 20 percent down is a great way to establish practical and healthy saving practices. If you have saved up for 20 percent down, you have probably learned how to manage your money wisely. That skill is going to come in very handy because the money outflow doesn’t stop once the seller hands over the keys to the front door!
Let’s say you have $80,000 saved toward a down payment. You’re wondering, why buy a $400,000 house with 20 percent down when you can buy an $800,000 with 10 percent down? Wow: more house, better neighborhood! Hey, that sounds like a deal. But it’s not. The entire real estate market and our economy in general were affected by the number of homebuyers who artificially exaggerated their purchasing power with this thinking—buying properties with 15, 10, 5, or even 0 percent down, thinking they were getting more house for their money. But what really happened was that homebuyers purchased homes that were higher priced and far more expensive than what they could ultimately afford.

Comments

By Mortgenius,  Tue Apr 3 2012, 18:52
Great Article Michael!
We have a new Transaction Calculator for Realtors and Consumers to help Structure the Perfect Transaction.
Would love your Input.

http://www.mortgenius.com

Wade Lester
By Catherine C. Capasso,  Wed Apr 4 2012, 04:50
This is a very practical outline for buyers and in plane English as well. 20% down, as you have said, always made sense. Besides getting more house for less down, you also get more taxes, another burden if your financial status changes. This time you are hurting your neighbors and your community.
By Really?,  Wed Apr 4 2012, 09:52
Who has that kind of money laying around? After going to college and my husband going to grad school, it would take us years to save up 30K. We never go out to eat, we aren't big shoppers, don't buy starbucks, only buy lunch maybe once a week. I'm not sure how we could save up that kind of money without it taking years. We have a modest apartment with awful rent and I drive 30-45 minutes to get to work because if I lived closer we would live in a shoebox for the same price. I just don't know how 20% is reachable.
By _Schlicker,  Wed Apr 4 2012, 16:34
"Instant equity building—A significant down payment builds instant equity in your home. A 20 percent down payment immediately puts equity into a property when you purchase it. That down payment safeguards you if the market turns downward temporarily."

How does having 20% equity in the house safeguard you against a market downturn? A significant downturn means you have the potential to lose your equity position entirely.

I agree that a 20% down payment is a better way to go than not, but this point I highlighted makes no sense whatsoever.
By Dthatcher,  Thu Apr 5 2012, 07:48
I wouldn't put a hefty down payment on a house in our current economy where savers are penalized and inflation is starting to take hold... by the time you get 20% saved you've actually lost money through inflation... your savings are worth less than they would have been and the house you buy is more expensive that if you had just gone in earlier with a minimum down payment.
Also, and this is the BIG reason why 20% doesn't matter anymore, is that people don't use their down payment to save on their mortgage. People use their downpayment to buy more house. You know it's true.
Lastly, if you aren't viewing your house as an investment, but as a permanent place to live, a 20% down payment isn't a big deal. I mean, you don't need tens of thousands of dollars to move into an apartment, just a couple thousand. Why should a house be any different?
Now if you ARE buying a house AS an investment (you plan to sell or move within 10 years) then yes, scrabble up that 20% down payment. Otherwise, it just isn't a huge deal. Jump in with what you've got and refinance once you've hit 20% equity.
By Melissawhited,  Sun May 27 2012, 10:37
In response to Dthatcher, I would think that whether you lose money or not to inflation by saving the 20% is dependent upon where you save it. It's not like you're putting that money under your mattress; you have short-term investment opportunities.
By Bigwave,  Mon Jul 9 2012, 06:00
The fed is devaluing the dollar like water flowing thru a facet. This is a tax by way of commodities eggs, milk, oil, gas, all cost more. Wake up people the only way to stop the bleed is get rid of fed. Obama care another huge tax. Never buy a house buy land with cash and build your own house. Is the real American dream. Settlers did not run out to get a loan from banks to build a house they cut down the trees on the land and made log cabins, Its called sweat equity. Or build a house boat and screw the government no land tax. Who were the only people Jesus thru out of the church, Answer the money changers that be the FED. Wake up people!!!
By Hawk,  Fri Jul 20 2012, 21:04
I think the idea of 20% is good, and has a lot of clout, but not in every situation. If I bought a 400k house with 40k down, as opposed to 80k, and I invested the other 40k into my retirement at 30 yrs old, it makes MUCH more sense to watch that money grow and pay the extra couple hundred on my mortgage each month. This will allow me to retire in a better state, no?
By Robin Thompson,  Sun Aug 12 2012, 23:50
So if me as a single mother doesn't save. the rich get richer and the poor get poorer.
By rachels.r.norman,  Tue Jan 1 2013, 20:31
With the controversy going around in these comments... I say, the more of a down payment you have, the sooner the home is to being yours. That to me, is the smart way to go regardless. I think the 20% down payment is smart. I also believe it will lessen the statistics of foreclosure. Stability! I plan on putting $1000. a month away for this. I am 29 years old. If I put $12,000 away in 12 months and my significant other puts $12,000 away, then we can get a pretty nice starter home and can manage the monthly payments. We've got to put our minds to it!
By wolejin,  Sat Apr 6 2013, 07:21
My own advice for two married couple's that is working is to use one income for bills and save the second income in another state. For example the wife makes $5000 a month and the husband make $3000 after tax. They should be able to save the lowest or highest income depending on their expenses and they will be able to save around $34k to $60k a year. I currently live in Dallas with my wife and our longtime saving account is in Austin, Texas. She told me I was insane and when we drove down there to open the account but different story after 9 months when she check the balance. I will advice every middle class to also pray to Jesus for wisdom so we can overcome poverty and 401k.
By chris09vassallo,  Sun Jun 23 2013, 11:50
Why does everyone ask "who has that kind of money to put 20% down?" This question drives me crazy!! If you don't have $80,000 to put down on a $400,000 then put $40,000 down on a $200,000!! You must live within your means. I can't stand that so many people feel they are entitled to everything! Work hard and budget well!
By blahdiblah,  Thu Jun 27 2013, 13:25
"who has that kind of money to put 20% down??"... well... most people i know who are buying a house do...
The point is... if you cant put down 20%... chances are you will not be able to handle the remaining 80% + tax + interest + utilities. Live within your means. That's the best advice i can give you.
By dlg2112,  Sat Mar 8 2014, 10:15
Really Really? I went to through grad school, 90% of living on campus and tuition on loans ~ 40k in debt. worked in school to help lower all needs. after 2 years a working I saved 20k and knocked off 10k off student loans. single income with a 2 yr old daughter and wife. i drive 15 year old cars, cook at home and know where every penny goes
By Fair.kellya,  Mon Mar 24 2014, 14:17
Well, when you live in a state like California, it is hard to find a home that is anything less than $400k. Which is why most of us out here will be lifelong renters. I have been saving for a home since I was in 7th grade...and it still seems SOOO far off! But I am not going to give up, because I refuse to! So hopefully I can snag a fixer-upper here in the next few years and go from there..
By colivero37,  Mon May 19 2014, 17:38
Well, that doesn't make to much sense....so basically put your money on a property...when the property is financially underwater you loose all your money!! Is just another way to strangle customers......
By colivero37,  Tue Jul 1 2014, 16:50
I don't understand the part of the equity!!! You put 40,000 for a 200K house and house will worth 240K??? That don't make sense to no one!
By DNA,  Sat Oct 4 2014, 11:32
The point about equity should have been explained more, but really, if you didn't understand it, you should consider the possibility that you haven't thought it through.

If the real estate market turns down, yes, your home loses value if you have 0% down, 20% down, or a fully paid-off house. But if you have very little equity, it's easy to end up underwater / upside down (owing more on the house than it's worth). This happened to many, many people in 2008-2009. Then you are trapped in the house - you can't sell it to move for a job, or move to a cheaper house, or move into a rental, because if you tried to sell you would owe the bank for the difference between the loan and house value. If you didn't have that money in good times (for the down payment), you sure aren't going to have it when times got tough.

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