Down Payment Perplexity: How Much to Put Down on a Home?

For many prospective homebuyers, the down payment is the most daunting obstacle in the race to buy a home.

Even though for people with decent credit and a healthy paycheck, the size of a down payment can be a great homeownership killer.

The big question for all prospective buyers is: how much should my down payment be? Most lenders will tell you that 20 percent is the standard, but is that really necessary? The short answer is no, but of course, there are some caveats.

According to Nancy Herrera-Siples, a Riverside, CA, branch manager at Primary Residential Mortgage, “It’s a myth that all homebuyers must have a 20 percent down payment to buy a home.” So why all the fuss over having 20 percent to put down? Well, “because if you don’t, it usually means you’ll have to shell out money for either private mortgage insurance (PMI) or government insurance, which is usually financed by the Federal Housing Administration,” as explained by Herrera-Siples.

Nonetheless, when a low down payment is your only option to buy a home, PMI might literally be a small price to pay. Additionally, remember that PMI goes away eventually when your loan balance is 80 percent or less of the home’s value. And if you’re in an area where homes are rising in value, this could happen sooner than you think.

Still, confused about the ins and outs of down payments? Here are a few reasons to go high… or low.

When to make a substantial down payment: Firstly, when you’re looking to keep your monthly payment as low as possible and have the cash to spare. Secondly, when you’re approaching retirement age and can envision a reverse mortgage sometime down the line. Furthermore, when the interest rate is lower with a higher down payment. “The more you put down, the better position you are in for negotiating a lower interest rate,” advises Credit.com.