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In an ideal world, home buyers would make a 20% down payment on a home. A down payment equal to 20% of the value of the property allows borrowers to avoid private mortgage insurance (PMI). PMI is an additional expense that borrowers have to pay when they don’t pay 20%, and it protects lenders from losses in the event of foreclosure.
Saving that much can be a huge challenge, especially in areas with very high house prices. If you’re struggling to find enough money to deposit, it might be worth looking at what most borrowers actually do with a down payment.
You may be pleasantly surprised to find that 20% down is far from an essential requirement.
According to the National Association of Realtors (NAR), the median down payment among all homebuyers in 2019 was only 12%. This is a huge drop from 1989, when the median down payment was the 20% that lenders tend to prefer.
For first-time home buyers, the median down payment was even lower. In fact, NAR data shows that the median amount first-time homebuyers put into their home in 2019 was only 6%. It was the repeat buyers who drove the overall median up, as they had a median down payment of 16%.
It is not surprising that first-time buyers have had lower down payments than people who already own. Many people who own properties may sell their homes for more than what they owe on their current mortgage, both because their property has increased in value and because they have built up equity over time. as they repaid their loans. (Equity is the difference between the value of your home and what you owe on your mortgage.) When people sell their current home and pay off their mortgage, they may have enough money left over to make a mortgage. larger down payment on their new home.
Should you invest less than 20% on a house?
As the NAR data clearly shows, a typical home buyer does not make a 20% down payment. And if you’re struggling to find that much money, you might be encouraged to check out this data.
It is important to realize, however, that while you can there are downsides to buying a home with a smaller down payment.
If you’re only paying 6% like a typical first-time home buyer, you may have a more limited choice of lenders willing to work with you. While many lenders do not require the full 20% down payment, there are a smaller number of mortgage providers willing to accept less than 10%.
A small down payment also increases the risk that you end up owing more on your mortgage than the property’s value. This is because you won’t start with a lot of equity. If property values ​​drop even a little, you could find yourself upside down on your loan. If you owe more than your home’s value, this can be a big deal as it can be difficult, if not impossible, to refinance or sell without bringing in some extra cash.
There is also the issue of PMI as mentioned above. This is usually around 1% of your loan amount each year and although you pay it off, it doesn’t protect you – you just incur an additional expense for the benefit of your lender.
Still, if you’ve factored in these drawbacks and decide to make a smaller down payment so that you can buy a home ASAP, you’re definitely not alone. In fact, NAR data shows that most of your fellow buyers have done the same.
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