Once upon a time, almost all lenders required a 20% down payment to purchase a home. And even though this hasn't been the case for many years now, many people still think 20% down is a rule of thumb. Unfortunately, these kinds of homebuyer myths have prevented many would-be investors from making their first purchase.
The truth is, you do not need a 20% down payment to sign the papers on your dream home. In fact, the average down payment is about half that amount at 11%, according to the National Association of Realtors, and many first-time homebuyers put down much less than that.
Exploring Your Mortgage Options
Now that you know 20% down is one of many homebuyer myths, you will probably be able to get into your first home for much less than you thought. So it's time to consider your options and crunch some numbers.
First, let's look at the down payment for other first-time buyers. In 2016, buyers under 35 years old put down an average of 8% on their first home, according to NAR's report.
This means you might be able to get into your home for much less than you thought. But still, there's a lot to consider before making the decision that is best for you, your family and your finances.
Benefits of a Small Down Payment
Buying a home is one of the biggest investments you'll ever make, which is why it's so vital to understanding all the fine details involved with such a big purchase. And as like with any investment, there's a certain amount of risk and reward.
It Saves Your Savings Account
One of the best parts of making a small down payment is the fact it won't completely drain your savings account. Many first-time home-buyers struggle to pay for all the additional fees and extras because they put all of their money towards a down payment.
When you reduce your down payment, you increase your ability to meet the other responsibilities you have as a homeowner. This can give first-time buyers a huge advantage when they're just starting out their new life in their new home.
Supply and Demand
Offering low down payments to new investors helps the entire real estate market thrive because it increases the supply and demand chain.
If more people are able to buy a home, that means more people will be able to sell their homes as well. This creates a competitive marketplace with lots of options for both buyers and sellers.
While small down payment programs certainly have their advantages, there are also some downsides to them. So it's important to weigh these pros and cons carefully before making your decision.
Increased Interest Rates
One of the most important aspects of any investment is the interest rate you'll be paying. But because a mortgage is typically one of the largest loans a person ever signs off on, it's especially critical to consider the interest rate on this agreement.
If you put down a small payment on a house, that means the lender is taking more risk with the loan. And because of this risk, low down payment mortgages often result in higher interest rates. However, if you shop around and talk to the right financial institutions, you might be able to get a fair interest rate despite making a lower down payment.
Anyone who is putting down less than 20% will be required to pay for mortgage insurance each month. This insurance only offers the lender protection in case the buyer defaults on their payments. But the good news is, once you have some equity built up in your home, you might be able to eliminate this monthly fee.
Dispelling Homebuyer Myths
The world of real estate has undergone some serious changes in recent decades, and the 20% rule has been all but eliminated in most cases.
So if you've always dreamed of owning a home but thought you couldn't save up enough to get one, it might be time to consider a low down payment program with reasonable terms and rates. With a little bit of effort and know-how, you'll be signing the closing papers before you know it!
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