What Are the Benefits of a 20% Down Payment?
If you’re thinking of buying a condo this year, you may be wondering how much money you need to come up with for your down payment. Many people may think it’s 20% of the loan to secure a mortgage. While there are plenty of lower down payment options available for qualified buyers who don’t want to put 20% down, it’s important to understand how a larger down payment can have great benefits too.
The truth is, there are many programs available that allow you to put down as little as 3.5%, which can be a huge benefit to those who want to purchase a condo sooner rather than later. Those who have served our country may also qualify for a Veterans Affairs Home Loan (VA) and may not need a down payment. These programs have really cut down the savings time for many potential buyers, enabling them to start building family wealth sooner.
Here are four reasons why putting 20% down is a good plan if you can afford it.
1. Your interest rate may be lower.
A 20% down payment vs. a 3-5% down payment shows your lender you’re more financially stable and not a large credit risk. The more confident your lender is in your credit score and your ability to pay your loan, the lower the mortgage interest rate they’ll likely be willing to give you.
2. You’ll end up paying less for your condo.
The larger your down payment, the smaller your loan amount will be for your mortgage. If you’re able to pay 20% of the cost of your new home at the start of the transaction, you’ll only pay interest on the remaining 80%. If you put down 5%, the additional 15% will be added to your loan and will accrue interest over time. This will end up costing you more over the lifetime of your home loan.
3. Your offer will stand out in a competitive market.
In a market where many buyers are competing for the same property, sellers like to see offers come in with 20% or larger down payments. The seller gains the same confidence as the lender in this scenario. You are seen as a stronger buyer with financing that’s more likely to be approved. Therefore, the deal will be more likely to go through.
4. You won’t have to pay Private Mortgage Insurance (PMI)
What is PMI? According to Freddie Mac:
“PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%. Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
As mentioned earlier, when you put down less than 20% when buying a condo or home, your lender will see your loan as having more risk. PMI helps them recover their investment in you if you’re unable to pay your loan. This insurance isn’t required if you’re able to put down 20% or more.
Many times, sellers looking to move up to a larger or more expensive home are able to take the equity they earn from the sale of their property to put down 20% on their next. With the equity homeowners have today, it creates a great opportunity to put those savings toward a 20% or greater down payment on a new condo or home.
If you’re looking to buy your first place, you’ll want to consider the benefits of 20% down versus a smaller down payment option.
Bottom Line
If you’re thinking of buying a condo and are already saving for your down payment, let’s connect to discuss what fits best with your long-term plans. Contact us today at 734-761-3060 or info@condohotline.com.
Saving up for a New Home or Condo? Here Are All the Costs You Need to Know
Once you’ve found the perfect home or condo and secured the loan, all that’s left to do is start chipping away at those mortgage payments…right? In actuality, there are a handful of other, often-overlooked expenses that come with buying a home, but as long as you know what you’re getting into, they’re plenty manageable.
Take a look at our comprehensive list of all the costs you need to know when buying a home or condo.
One-Time Payments & Closing Cost
Saving up for a New Home or Condo? Here Are All the Costs You Need to Know
Once you’ve found the perfect home or condo and secured the loan, all that’s left to do is start chipping away at those mortgage payments…right? In actuality, there are a handful of other, often-overlooked expenses that come with buying, but as long as you know what you’re getting into, they’re plenty manageable.
Take a look at our comprehensive list of all the costs of buying a home or condo.
One-Time Payments & Closing Costs
Closing Costs
For buyers, closing costs are typically low and range from 2-5% of your purchase price. A lot of these costs are one-time expenses, and totals can vary from state-to-state.
If you want a better idea of what closing costs could be for you, check out this helpful guide on the average payments for each state.
Miscellaneous Fees
There are quite a bit of one-time fees bundled into your closing costs, but most of them are pretty inexpensive. Some of the most common expenses include the home inspection, appraisal, credit report, deed recording, land survey, notary fees, title insurance, and document prep fees.
Recurring Payments
Mortgage Payments
Mortgage payments are the most obvious cost when buying a home. These are your predictable, monthly payments decided by both the final price of your home and your down payment—in addition to a few other bundled costs. A larger down payment means a smaller mortgage payment, and it’s a good idea to pay this off quickly, since it will accumulate interest.
Property Taxes
Property tax payments don’t go towards just one thing—they actually cover quite a bit, like road construction, community maintenance, public works, and local government salaries. The exact amount you’ll pay in property tax is calculated by the county based on your home’s value, and the rates tend to rise and fall over time. Many buyers pay their property taxes through an escrow account set up by the lender.
Homeowner’s Insurance
It’s better to have insurance and not need it than need insurance and not have it, so homeowner’s insurance is pretty crucial to home owning. While it’s almost always required when you get a mortgage and then bundled into your monthly payments, be sure to double-check that you’re covered.
Private Mortgage Insurance
If you can’t afford a 20% down payment on your home, you’ll have to pay PMI as a way to ensure that the lender won’t go under if you default on your loan. You don’t have to pay PMI forever—it ends once you pay off 78% or more of the principal amount—but until then, expect to pay up to 2% of your loan amount annually.
HOA Fees
Moving to a neighborhood with an HOA? Your dues can range anywhere from under a hundred dollars to over a thousand, but they come with perks like landscaping and exterior maintenance, and some even include added benefits like swimming pools and fitness centers. Not all neighborhoods have an HOA, but your agent can tell you what your payments will be if yours does.
Utilities
Lastly, utility fees can come as a surprise to new homeowners who are used to renting. Depending on the size of your home, you can expect to pay a few hundred dollars per month for water, electricity, heating and cooling, and trash services. If you’re curious what your utility bills might look like, just ask your agent, and they can likely secure a few statements from the past owners.
Ready to Make an Offer?
When it comes to buying a home, the most important thing you can do is be prepared. While there are a handful of costs to keep in mind, the satisfaction of calling a place your own is well-worth it in the end.
Are you ready to get started on your home-buying journey? With years of professional and local experience, our condo professionals at The Bouma Group knows all about navigating the expenses that come with buying. Give us a call today at 734-761-3060 or info@condohotline.com to get a better idea of your costs, and let’s get started!