In most cases, to purchase a home, a down payment is required. Except for VA loans available to US Veterans, the days of zero-down mortgages are, basically, a thing of the past. Even at the height of the real estate lending boom, lenders looked more favorably at borrowers who could afford some amount of down payment – and from the lender’s perspective, the bigger, the better, since it minimizes risk.

Today, future homeowners are encouraged to amass a down payment before approaching a lender to request a loan. Generally, down payments of 20-percent are looked at favorably but to assess how essential or beneficial that amount may be, let’s look at the advantages and disadvantages.

The Advantages of a 20-Percent Down Payment:

• More Likely to Be Approved. Lenders generally look favorably on those who can afford to make a large down payment. Homeowners with a significant amount of equity in their homes are less likely to miss payments. If you’ve previously had credit problems, a significant down payment could make the difference between being approved or denied.

• Eliminates the Need for Private Mortgage Insurance. PMI is a way for lenders to insure against a possible foreclosure. Unfortunately, until a 20-percent equity position is reached, borrowers are required to pay PMI. Eliminating PMI, can save thousands of dollars in mortgage costs.

• Lower Interest Rate. Those borrowers willing and able to tender a 20-percent down payment may additionally qualify for slightly lower interest rates. Even slightly lower rates can produce substantial long term savings.

• Instant Equity in Your Home.  A substantial down payment translates to instant equity in your home and that equity can potentially be leveraged in the future.

• Lower Payments. A larger down payment reduces the debt owed the lender. This produces lower monthly payments which may improve quality of life and reduce overall stress.

The Disadvantages of a 20-Percent Down Payment:

• Takes Time to Save. The average price of a home in the United States is nearly $200,000. To make a 20-percent down payment, $40,000 would need to be accumulated. For some prospective buyers, saving that amount could take years while homes of interest may sell or increase in price as the market changes.  Increasing prices may produce a cycle forcing borrowers to save even more.

• Large Amount of Capital Tied Up. For those who prefer to make their money work for them rather than just sit in a bank or be tied up in non-liquid assets, investing a large amount of your available capital up in a home might adversely impact ability to capitalize on other opportunities.

While it may appear that the pros of making a large down payment outweigh the cons, ultimately it is up to each individual to determine which approach is best suited to their situation. Amongst others, an experienced real estate agent can help you to make the right decision. Feel free to contact me today for a consultation. I will be happy to answer any questions you may have, and/or help you find your dream home.

Allyson Hoffman, ABR, ACRE, CDPE, CRS, e-PRO, GRI, SFR, SRES
RE/MAX Villager
Serving Chicago's North Shore, North and Northwest Suburbs
[email protected]

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Allyson Hoffman is your ultimate real estate resource for Chicago's North Shore, North and Northwest Suburbs and surrounding areas. Visit my website for detailed information regarding today’s real estate markets.   

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