If you’re planning to buy your next home, you’ve probably heard that you should put at least 20% down.
That has been the traditional rule for many years, but it isn’t a requirement for most buyers. There are several financing programs that allow qualified buyers to purchase a home with considerably less than 20% down.
Even so, many repeat buyers are choosing to put down 20% or more. According to the National Association of Realtors, the typical repeat buyer now makes a down payment of approximately 23%.
So, if they don’t have to put that much down, why are they doing it?
There are two primary reasons. First, a larger down payment can provide some significant financial advantages. Second, many longtime homeowners have accumulated enough equity in their current homes to make a 20% down payment possible.
Repeat Buyers Are Putting More Money Down
The typical repeat buyer puts down approximately 23% when purchasing a home. That’s more than double the 10% down payment commonly made by first-time buyers.
[Insert NAR repeat-buyer down-payment graph here]
How are repeat buyers able to come up with that much money? In most cases, the answer is the equity they’ve built in their current home.
When you own a home for a number of years, two things generally happen. You gradually pay down your mortgage, and your home will hopefully increase in value. The difference between your home’s current market value and the amount you still owe is your equity.
For example, if your home is worth $700,000 and you owe $300,000 on the mortgage, you have approximately $400,000 in gross equity. Your actual proceeds would be reduced by selling expenses and other costs, but that still represents a substantial amount of purchasing power.
When you sell your home, that equity becomes cash you can use toward your next purchase. According to NAR, most repeat buyers use proceeds from the sale of their previous home as the primary source of their next down payment.
[Insert NAR down-payment source chart here]
First-time buyers haven’t had the opportunity to build that kind of equity, and that’s perfectly normal. But if you’ve owned your home for several years—especially here in Parker or the surrounding Denver metro area—you may have considerably more equity than you realize.
That equity could make buying your next home more affordable, even with today’s mortgage rates.
Four Advantages of Putting 20% or More Down
If you have enough equity to put 20% down, it’s certainly worth considering. Here are four of the most important benefits.
1. A Lower Monthly Mortgage Payment
The more money you put down, the less you have to borrow.
That means a lower monthly principal-and-interest payment. With mortgage rates higher than they were several years ago, reducing the amount you finance can make a meaningful difference in your monthly expenses.
For many homeowners, this is what makes moving into their next home financially comfortable.
2. Less Interest Over the Life of the Loan
A smaller mortgage doesn’t just lower your monthly payment. It can also substantially reduce the total interest you pay over the life of the loan.
If you put 20% down, you’re financing 80% of the purchase price. If you put only 5% down, you’re financing 95%.
That difference can amount to tens of thousands of dollars—or considerably more—over a 30-year mortgage, depending on the home’s price and the interest rate.
3. You Can Avoid Private Mortgage Insurance
When you put less than 20% down on most conventional loans, the lender will generally require private mortgage insurance, commonly known as PMI.
PMI protects the lender if the borrower defaults. It does not protect the homeowner, but the homeowner pays for it as part of the monthly mortgage payment.
Putting at least 20% down will usually eliminate the need for PMI, which can save you money every month.
4. Your Offer May Be More Attractive to the Seller
A larger down payment may also strengthen your purchase offer.
From a seller’s perspective, a buyer with a substantial down payment may appear to be better qualified and less likely to encounter financing problems before closing. It can also provide some additional protection if the appraisal comes in lower than expected.
A 20% down payment won’t automatically make your offer the best one, but when a seller is comparing two otherwise similar offers, stronger financing may help yours stand out.
Is Putting 20% Down Always the Best Decision?
Not necessarily.
Putting more money down has some definite advantages, but you don’t want to use every available dollar for your down payment. It’s important to keep enough cash for closing costs, moving expenses, possible repairs or improvements, and an emergency reserve.
You should also consider whether some of your available funds would be better used to pay off higher-interest debt or remain invested elsewhere.
The right down payment depends on your finances, your comfort level, the home you’re buying, and your plans for the future. A good lender can compare several down-payment scenarios so you can see the actual difference in your monthly payment, cash requirements, and long-term interest costs.
Bottom Line
You don’t have to put 20% down to buy your next home. Plenty of buyers successfully purchase homes with less.
But if you’ve owned your current home for several years, the equity you’ve accumulated may put a larger down payment within reach. Using some of that equity could lower your monthly payment, eliminate PMI, reduce the interest you’ll pay, and make your offer more attractive to a seller.
Before deciding, start by finding out what your current home is worth and approximately how much you would receive from the sale.
If you’re considering selling your home in Parker or one of the surrounding communities, Cheryl and I would be happy to prepare a detailed market analysis. We can help you determine how much equity you may have available and how it could be used to make your next move possible.