What to Consider When Deciding How Much to Put Down on a Home

Buying a home requires extensive financial planning. While the widely accepted standard for down payments has been 20% of the purchase price for decades, many are wondering if that’s still required. In reality, there are ways to qualify for a mortgage with less than 20% down payment—even some options without a down payment at all. However, there are advantages and disadvantages to these options and with paying a larger down payment. Here we’ll go over some pros and cons of choosing a higher down payment on your home purchase.

Higher Down Payment Pros

You’ll Look Better to Lenders & Sellers - Typically, homebuyers who can offer at least 20% down on a mortgage will have more options for favorable mortgage terms. A higher down payment might help you get a lower interest rate, which will save you thousands of dollars over the life of your home and lower your monthly bills. Offering more money up front is also attractive to sellers who are looking for reassurance that the deal will go through. If you can put down a higher down payment than other potential buyers’ offers, you can get a competitive edge.

You’ll Avoid PMI - Private Mortgage Insurance, or PMI, is only required when you borrow 80% or more of the home’s purchase price. Therefore, going with the recommended 20% down payment will allow you to avoid paying this additional ongoing expense. The percentages for this insurance are small but can add up to thousands of dollars over the years until you build up that same 20% amount in equity. Since this insurance is purely there to protect the lender, it doesn’t benefit you at all and may be an avoidable expense.

Higher Down Payment Cons

You Might Be Draining Your Savings - It’s easy to overspend on your down payment. Painstakingly saving up all of your money and spending your entire savings to make that coveted 20% down payment amount will not leave you in a financially stable position. Some may also be tempted to deplete retirement funds for a down payment, which may incur penalties and use up a lifetime’s worth of savings. You’ll be without backup in case of emergencies or unexpected home expenses either during or once the deal has closed.

To avoid this, many financial advisors suggest saving up a small emergency fund to cover at least 6 months’ worth of living expenses and keeping it completely separate from the amount you plan to spend on a down payment.

You Have Less Market Flexibility - One advantage to the higher upfront price point is that it forces you to make your decisions more carefully. However, that advantage also comes with the reality of it taking a long time to build up the money for the down payment. The longer you spend saving up for a home, the more you risk losing chances at a great price. While the housing market fluctuates, if the prices in your desired area skyrocket before you’ve had enough time to save for your down payment you’ll regret not moving more quickly.

No matter how and how much you decide to pay up front for a home, you have many factors to consider. When in doubt, always consult a financial advisor for more specific advice regarding your unique situation so that you can make the best home buying decision.