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Do I Need 20% Down to Buy a Home?

Cristinne Nordgren

Cristinne joined the BHurd team in 2016...

Cristinne joined the BHurd team in 2016...

Aug 21 3 minutes read

If you’ve been on the house hunt for a while, chances are you’ve heard this advice before, “You need a 20% down payment to buy a home.” But with home prices and interest rates on the rise, many homeowners are finding that saving that 20% can feel more and more out of reach. 

So, do you really need to put 20% down in order to buy a home? You may find out you are closer to purchasing a home than you think. 

The short answer is, no. You don’t have to have put 20% down before purchasing a home. You can purchase a home with less, sometimes a lot less. In fact, according to the National Association of Realtors, “the largest share of loans for buyers under age 35 last year [2017] were for people putting down less than 5 percent on a home purchase (or about $3,500).”

The 20% down principle is believed and advised to this day because you need 20% down to avoid mortgage insurance on most loans, but it’s important to know that today’s homeowners have more options.The 3% down payment programs backed by Fannie Mae and Freddie Mac, and the 3.5% FHA mortgage are both helpful programs to consider. 

In fact, using all your spare capital to make up that magic 20% for a down payment could end up hurting you. Here are some reasons not to put down 20% on your first home. 

  1. You can buy sooner. No doubt about it, home prices and interest rates are rising. Waiting to save for a down payment is risky. You may find that you end up paying more in higher home prices and interest rates. 

  1. You have more cash readily available. It’s a good idea to keep a savings account for unforeseen financial events, like a job loss or medical bills. If you use all your cash in a down payment, you can find yourself in a tricky situation.

  1. You can make needed repairs or improvements to your home. A large majority of homeowners find they want to personalize their home after the purchase. New appliances, furniture, and necessary maintenance equipment like lawnmowers or tools can all add up quickly in that first year.

  1. You can invest elsewhere. You can borrow from and even completely drain your 401k for a down payment. However, experts agree you’re better off continuing to invest in your 401k, as withdrawing from this account limits compound interest you could have earned.

Bottom line, if you’ve been thinking about becoming a homeowner, don’t let that 20% myth hold you back. Talk with a real estate consultant on the BHURDinUtah team. We can put you in contact with one of our trusted lending partners to discuss your financing options. It’s a great time to be a homeowner. Start your search today. 

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