Should I put 20% down on a house, if I can afford it?

February 15, 2014 | By Brandon Cornett | © 2018, QualifiedMortgage.org | Our copyright policy

Reader question: “We have been saving up to buy a house for quite some time. As a result, we might actually be able to put 20% down on our mortgage. I’m just wondering if it makes sense to do this. I’m sure there are both pros and cons to consider. Should I put 20% down on a house if I can afford to do so?”

Mortgage lenders don’t necessarily require you to put 20% down. There are plenty of loan programs that offer smaller down payments, including the always popular FHA program that allows borrowers to pay as little as 3.5% of the purchase price. Sometimes lenders will require 20% for jumbo loans that exceed Freddie Mac’s conforming loan limits. But aside from that, borrowers have some degree of flexibility when it comes to the size of the down payment.

You’re actually in a very good position, from a borrowing standpoint. You can afford to put more money down on a house, if you choose to do so. The question is, does it make sense given your particular financial situation. Should you put 20% down on a house? Consider the following benefits.

Benefits of Putting 20% on a House

If you choose to go with a larger down payment, you will probably have an easier time qualifying for a mortgage loan. That’s because you are essentially reducing the lender’s risk. When you put 20% down on a house, as opposed to say 5% or 10%, you are reducing the size of the lender’s investment. As a result, they may be more forgiving with their qualification criteria.

You might also qualify for a lower interest rate if you put 20% down. Again, this ties back to the concept of risk reduction. Lenders typically offer their best rates for borrowers who are less of a risk. Having more “skin in the game” makes you less risky, as a borrower.

Another major benefit of putting 20% down on a house is that you won’t be required to pay private mortgage insurance, or PMI. These insurance policies are typically required whenever a single loan accounts for more than 80% of the home’s value. Stated differently, PMI is generally required when a borrower makes a down payment less than 20% on a loan. PMI increases the amount of money you pay overtime, and also increases the size of your monthly payments. Should you decide to put 20% down a house, you will avoid this extra expense. Another big bonus!

You’ll also end up with a smaller monthly payment if you pay more money up front. A larger down payment reduces the amount of money that you have to borrow from the lender, which in turn reduces the amount you have to pay each month. This allows you to put more of your monthly income toward savings, entertainment, travel, etc.

Those are some of the biggest benefits of putting 20% down on a house. But you also have to consider what else you might be able to do with that money. If you have investments of some kind, you should consider the potential return on investment of that money, as opposed to putting it toward a mortgage loan. You might be better off making a smaller down payment of 10%, and putting that extra amount toward your investment strategy. Obviously it’s not something you want to rush into. You need to do the math to see what works out best for you, given your financial situation.

That’s a long answer to a short question. Should you put 20% down when buying a house? That’s really up to you. But there are some pretty big advantages of doing so. You’ll probably have an easier time getting approved for a loan. You’ll avoid having to pay private mortgage insurance or PMI. You’ll have a smaller monthly payment. And there’s a good chance you will qualify for a lower mortgage rate. Those are some pretty compelling arguments for a 20% down payment.