If you have a good credit history, your lender may only require between 3.5 and 5 percent down. This is perfect if you're cash-strapped or want to maintain a financial cushion. But if you have money in the bank and you can afford a higher down payment, there are benefits associated with putting 20 percent down on a home loan.
Avoid Private Mortgage Insurance
If you put 20 percent or more down on your house, you won't have to buy mortgage insurance. This insurance protects the lender in case you default on your loan and is typically required on all conventional loans that cover more than 80 percent of the value of the home. The cost of mortgage insurance varies, but you can expect to pay between 0.05 and 1 percent of your home loan balance annually. You save this expense by putting 20 percent down on your home loan.
Although it may seem like an obvious point, the higher your down payment, the more equity you have in the property. Starting off with a sizable amount of equity reduces the risk of an underwater mortgage in the event of an economic downturn, and gives you some flexibility should you want to refinance or sell in the future.
Lower Interest Rate
Depending on your lender, a higher down payment can open the door to a lower interest rate. At the very least, a high down payment increases your negotiating power: lenders are likely to see you as financially stable, and they may be more likely to want your business and to offer you favorable rates. A lower interest rate results in a lower mortgage payment and reduces the total interest over the life of the loan.
A 20 percent down payment is also beneficial if you want to borrow as little as possible. The more you put down on the property, the less you have to finance with a lender. This can free up a good deal of money in your monthly budget, possibly hundreds of dollars, depending on the size of the loan.
Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.