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Financial Planning

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September 15th, 2020

"Finally....the real amount to put down on a home."

The rule of thumb is 20%, but why 20% and what is this 20% doing for you?

First off, a down payment is typically required for a conventional mortgage (Google – "credit crisis 2008 mortgages") if you do not want to pay for Private Mortgage Insurance (PMI) coverage.

Putting 20% down helps to avoid paying extra for PMI coverage, increases your chances of being approved for a mortgage, increases the chances you will receive a lower interest rate, decreases your monthly payment since you are borrowing less which decreases your debt to income ratio, and builds instant equity in your home which helps protect against going underwater on your mortgage during economic downturns.

PMI Coverage:

  • This is an extra insurance most lenders will charge for borrowers who put down less than 20%
  • This insurance safeguards the lender against the extra risk they are taking for lending more money to you

Greater Likelihood of being approved:

  • Since the bank is lending you less money in comparison to the value of the home, there is less risk for them which increases the likelihood they will approve you.

Lowers your interest rate:

  • Less risk = lower rates.  The bank is “buying” 100% of your home for 80% of the market value.

Decreases your monthly payment:

  • As you borrow less, your payment decreases and PMI coverage is no longer needed
  • Gives you more cash on hand to save and invest

Decreases your debt to income ratio:

  • Home buyers must now meet a 43% debt to income ratio which means that their total debt payments each month cannot exceed 43% of their monthly income – a lower payment will help keep you under 43%
  • Lower debt to income ratios will help you qualify for additional financing be it for a new car, credit card, student loan, etc.

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