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6 Reasons To LOVE A 20% Down Payment

20% down makes you more likely to get a mortgage — and pay less for it.

Screen Shot 2014-02-11 at 4.37.43 PMIt’s almost Valentine’s Day, which has me thinking about everything I love about real estate, which includes searching Trulia for hours on end, looking at pictures of amazing homes, and daydreaming about what it would be like to live in them. But before I let myself get too far into a really nice real estate daydream, I always give myself a reality check: It takes money to buy a house.

I have always been an advocate of the 20% down payment when buying a new pad. It’s the gold standard that so many people forgot about when they were buying homes they could not afford in the mid-2000s.

Now that the housing bust and foreclosure crisis are appearing in our collective rearview mirror, let’s revisit all the reasons why I — and you! — should love the idea of a 20% down payment.

1. Improved chance you will actually get that mortgage

The first and biggest reason to come up with 20% down is that in today’s mortgage marketplace, many banks won’t give you a mortgage unless you come up with at least that much money prior to buying a house. The loan programs that once existed for 10, 5, and even 0% down payments are far scarcer now than in the past — and for good reason!

2. The Consumer Financial Protection Bureau just changed all the rules!

The Consumer Financial Protection Bureau just issued new “qualified mortgage” rules. Now homebuyers will have to meet a 43% debt-to-income ratio. That means that after you add up mortgage payments, property taxes, and other debt, such as revolving credit card balances, car, or student loans, your total debt has to be less than $43 for every $100 in income you earn per month. Putting down 20% reduces the size of your monthly mortgage payment, making you more likely to qualify for — and afford — a mortgage.

3. A smaller monthly mortgage payment!

Who doesn’t love to pay less? I know I simply adore a smaller payment. More money down means you borrow less, which means you will have a smaller mortgage, which means you will always have smaller, more affordable monthly mortgage payments.

4. A lower interest rate = you pay less over the life of the loan

The interest charged on a loan with 20% 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 down 20% 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% of the sales price or appraised value. Many lenders will even add a percentage that is much like an insurance policy onto the mortgage interest rate. Ouch!

6. Instant equity building

A significant down payment builds instant equity in your home. A 20% down payment immediately puts equity into a property when you purchase it. That down payment safeguards you if the market turns downward temporarily.