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If you are planning to buy a house, there is so much you will need to figure out before you start looking at homes and ultimately make an offer, sign a contract and close on your new home. Just one thing to consider is the amount of down payment you will make on the home you buy. Many people will tell you that you need a minimum of 20% of the purchase price of the home to put down before you even consider buying a home. While a 20% down payment is common, there are low down payment mortgages available meaning you may be able to put as little as 3 or 5% down and still qualify for a mortgage. 

There are some advantages to making a larger down payment on a home. When you have less than 20% equity in the home you purchase, you will be required to carry PMI (private mortgage insurance) and this can cut into your housing budget. This insurance will protect your lender should you default on your mortgage and offers no protection to you. It is paid as part of your mortgage payment so there isn’t a way to get around having it. The lender will remove this from your payment once you build a certain amount of equity in your home but that may take time and you can spend a good bit of money on PMI for years before you are able to stop paying it. 

A larger down payment will also look good to the lender if you have had credit problems in the past. Even if your credit issues were years in the past, lenders may be hesitant about approving you for a loan. A larger down payment can help that since you are committing a larger amount of money toward building equity in your home, which means you are less likely to miss a payment on your mortgage. If your home goes into foreclosure, the mortgage holder would receive any equity left in the home after it was sold meaning you would lose the money you made as a down payment plus any additional equity you built up making monthly mortgage payments. A 20% down payment just might be the difference you need to get the loan approval you want. 

Interest rates can vary and the lender might be willing to give you a slightly lower interest rate with a larger down payment. While the interest rate difference may only be as much as an eighth or quarter of a percent, when you are borrowing hundreds of thousands of dollars, this can still provide significant savings over the life of your mortgage. The instant equity you have in your home with a larger down payment might also be beneficial if you were to need to borrow money in case of any emergency. 

What if you decide not to make a 20% down payment or you don’t have the savings for a down payment that large. Should you wait and save money for possibly years to be able to purchase a home? In today’s market, home prices are appreciating in almost all areas meaning a couple years of delay could cost you tens of thousands on the purchase price of a home if you have to wait several years to buy. Depending on where you live and the size of your family, you may also throw away thousands upon thousands of dollars on rent until you are able to save up enough money for a 20% down payment. 

There is not a right or wrong answer to this question. The best thing to do when deciding what is best for your situation is to talk with a mortgage professional or financial advisor to determine the best solution for you and how they can help you reach your goals.