If you talk with anyone 50 or older about buying a house, they’ll likely tell you that you need to put at least 20% down. That’s a traditional down payment amount needed to secure a mortgage. It may be conventional, but it’s not necessarily reality in this day and age.
In fact, the median down payment today is only 12%, according to the National Association of Realtors (NAR) 2021 Home Buyer and Seller Generational Trends report.
While your parents probably put down 20% when they first bought their house, prices in the 70s were much lower than today’s. While you may be able to get away with putting only three to five percent down these days, it’s still wise to put at least 20% down so you don’t have to pay mortgage insurance. Bonus: you’ll get a lower interest rate.
As prices have risen and mortgage lenders have gotten more competitive, the acceptable down payment has decreased significantly.
How Much Should You Put Down?
You may ask yourself: should I put 20% down on a house, even if it’s not required? The answer will depend on your situation, but most people put between six and 12 percent down. There are some instances where a large down payment is better, such as if you have a lot of money saved but a low income. This will give you a lower monthly payment to worry about.
If you have a high income but not much saved in the bank, you’ll want to go with a low down payment.
20% vs. Less
Applying a large down payment allows you to afford more house with the same monthly income. Your monthly mortgage payment will be lower.
On the other hand, making too much of a down payment could hinder you later on. In fact, applying a big down payment can lower your rate of return. Also, once that down payment is applied, you can no longer access that money unless you refinance, take out a home equity loan, or sell your home.
When you buy a home, that cash you put into it becomes an asset called home equity — the monetary difference between the value of your home on paper and what you owe to the bank. As such, it’s an “illiquid asset,” meaning you can’t easily access or spend it.
With a small down payment, you can retain your cash instead of investing it in real estate.
In the end, the decision on how much to put down is a highly personal one, and one that will depend on your current financial situation. Your trusted real estate agent can guide you in the decision on a wise down payment amount.
Contact Berkshire Hathaway Premier Properties About Home Financing
Ready to put an offer in on a home? Get professional help when you contact Berkshire Hathaway Premier Properties today at 713-862-0000.