Is 20% Really The Average Down Payment on a Home?

couple signing house contractAsk most home buyers about what’s the average down payment on a home would be, and they’d probably answer with 20% of the house’s purchase price. Now you’re probably thinking that you couldn’t possibly afford that. While there are great reasons for putting down a 20% home deposit, some lenders might allow you to put down a down payment that’s less than 20%.

20% Down Payment

While 20% might seem like a very sizable amount, you’d actually paying less in the long term if you could make a down payment of 20% of higher on the home you’re looking to purchase. This is mainly because putting down 20% would give you a lower interest rate on a home loan and you do away with private mortgage insurance (PMI), which could tack on a couple of hundred to your monthly mortgage payments.

The reason that lenders require PMI is because of the higher risk lenders assume on home loan’s with less than 20% down payment, explains one of the top mortgage brokers from the Altius Mortgage Group in Salt Lake City. Fortunately, once you have reached 80% loan-to-value (LTV) ratio, or have paid off the equivalent of 20% of the value of your house, you could request that your lender cancel your PMI. Likewise, if you reach 78% LTV, your lender would be legally obliged to cancel your PMI.

Less Than 20% Down Payment

If you’re unable to make a down payment of 20%, you could look for lenders that would allow you to make a down payment of less than 20%. You could also look into loans, such as FHA and USDA loans that enable qualified borrowers to put down smaller down payments on certain loans. Do note though that because you’d be funding a higher amount, regardless of the terms, you would need to make higher monthly payments because of the higher interest rate.

The Bottom Line

A higher down payment equals a more affordable mortgage and the lower the down payment, the more costly the mortgage. However, it is very crucial to note that under the right circumstances, putting a lower down payment could be a viable option. For instance, it’s an excellent way to buy a house and begin building equity on it, and you just have to budget wisely due to the relatively higher monthly payments.

Likewise, you might likewise qualify for a refinance after several years. That being said, for a majority of home buyers, buying a home is likely the biggest financial decision they will make in their lives, so shop around and talk to different lenders to ensure that you secure the best home loan for your needs.