Buying your first home is an exciting and emotional process, fraught with lots of important decisions that could have long-term consequences. Aside sifting through dozens of MLS listings and figuring out which type of mortgage is right for you, another key choice you’ll have to make is how much of your hard-earned savings you’d like to put up as a down payment on your first place.
In years past, homebuyers always provided 20% of the house’s purchase price as a down payment – for years, this practice was followed with fidelity and hardly ever deviate from. However, by the end of the 1980s it became increasingly common to put down only 10-15%, and by the time the housing bubble burst in 2007, many people were securing mortgages with no down payment at all. Because of the debacle loose lending standards created, banks have largely pulled back on no money down mortgages, and many personal finance experts have advocated a return to the 20% down standard.
While most banks require homebuyers to put down at least 5% on your first home, the question of whether or not you should fork over the traditional 20% is yours to answer. So should you? As with most financial decisions, there are pros and cons to giving over a huge chunk of change to your mortgage lender. Take a look at the information below to figure out if putting down 20% is right for you:
Pros To Putting Down 20% On Your First Home:
- Instant equity – Putting a substantial amount of money down on your home means that you’ll be moving in with a serious amount of equity already built in. This will put you ahead of your peers on the path to a wealthy future.
- Favorable loan terms – Banks usually reward borrowers willing to provide a large down payment with a lower interest rate; this could save you big bucks over the long term.
- Lower monthly payments – The more money you put down on your mortgage (or any other loan) the lower your monthly payments will be. This means your monthly cash flow will be less tied up in debt and more available for other investments.
Cons To Putting Down 20% On Your First Home:
- A major hit to your savings – For most people, putting down 20% on a home means forking over $20,000-$50,000. This means that your savings is likely to take a really big hit if you put 20% down. Be sure that this is something you’re comfortable with before committing to it.
- Decreased flexibility – Keeping money in cash means you’re holding onto flexibility; with a cash reserve, you can buy a new car, pay for a medical expense, or take a trip. If you give up all you cash to your new home, you might be limiting your future choices.
- Lack of diversification – Sinking a huge chunk of change into one investment (your home) means that you have a lot of cash tied up in one place. If the value of your home plummets, that means a big portion of your “portfolio” will have depreciated. It might be worth putting less money down in order to diversify your funds a bit.
Figuring out how much money to put down on your first home is a very personal process, so consider your total financial picture and the pros and cons above before making your final decision.