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I want to talk about the typical down payment on a house, as the most common number when talking about down payments is 20%. Financial experts actually encourage people to put 20% down on a home. And, almost any article you read about buying a home will talk about coming up with your 20% for a down payment as one of the first steps in buying a home.
But is 20% really the typical down payment on a home? Do most first time home buyers really save that much? This article is about today.
Why do experts recommend 20% down payment?
Before we dive into the typical down payment on a home, I want to talk about why so many financial experts talk about putting 20% down. After all, putting 20% down on your home is the gold standard in the industry, and there are a few reasons why.
First of all, when you put 20% down on your home, it means you have a good share of one of the biggest investments you will ever make. And, because it’s such a great purchase, it’s wise to own a solid amount. Eventually, the goal is for you to become the sole owner of your home over time. Until then, the bank is the entity that owns the majority of it, and you’re essentially buying it back from the bank.
Second, when you put 20% down on your home, you avoid paying for something called private mortgage insurance. Private mortgage insurance is a monthly insurance payment that doesn’t really benefit you in any way. It exists solely to protect the bank from buyers who can’t come up with a 20% down payment. This is because buyers who do not have 20% are considered risky buyers. Therefore, the bank wants to make sure that the homeowner is insured if he or she cannot pay the mortgage bill. To put it another way, if you can’t actually pay those bills, the bank charges you an extra bill every month to cover them.
Finally, the consumer who Doing Save 20% for a home and couples with excellent credit usually qualify for some of the best interest rates. Saving even a half cent or 1% on the mortgage rate can save you thousands of dollars over the course of your loan. Therefore, it is a great goal to strive for. That said, most homeowners, especially first-time homeowners, don’t put down the full 20% on a home.
What is the typical down payment on a home?
According to a 2018 report by the National Association of Realtors (NAR), 55% of home buyers who used a mortgage to purchase a home put down 6% or less. And, 72% of homebuyers who used a first-time mortgage put down 6% or less on their home in 2018. So, the typical down payment on a home is actually closer to that 6% mark. So, contrary to popular belief, the majority of people who buy homes are No Putting 20% down payment.
Here at Millennial Homeowner, we like to encourage our readers to put at least 10% down on a home. And, the reasons for this are the same as mentioned above. Namely, it’s a good idea to keep a good portion of your biggest investment ever. If you need help saving for a down payment right away, check out our Down Payment Accelerator. This is one product that can help you stay motivated and fill up that down payment fund as quickly as possible.
Should I wait to buy so I can make a bigger down payment?
Deciding when to buy a home and how much to put down is a personal decision. What’s right for you really depends on your own personal finances, your comfort level with the loan and the cash flow you have available to buy the home. If you need help determining how much home you can really afford (not just what the bank tells you you can afford), you can use our handy mortgage affordability calculator. This should give you a good idea of how much home you can actually afford, and it can also show you how the size of your down payment may impact your monthly mortgage payment.
How can I save up for the down payment right away?
Hopefully, after reading this, you will see the value in saving up a substantial down payment for your home purchase. You may want to put down 10% or 20% instead of 6% or less as many other homeowners do.
For most millennial homeowners, saving up for a down payment on a home will be the largest amount they ever save for a purchase. So, this is a huge achievement. But, if you’re looking forward to saving it quickly, we’ve got some tips for that too.
Once you’ve determined how much down payment you want to save, open a separate savings account, preferably a high-yield savings account. It is very helpful to keep your savings somewhere away from your regular expenses. This way, you can make it quickly without drowning in it. Do your research because interest rates on high-yield savings accounts are constantly changing.
Next, set up automatic transfers to that account every time you get paid. Again, taking a hands-off approach to building this savings account is the fastest way to help it grow. A great way to keep such a large amount of money from growing in your account and avoid being tempted to spend it on something else.
Finally, take up a side hustle and put that money into your separate down payment fund. A side hustle combined with automatic savings is the best combination to reach your down payment goal faster.
You can save more than the typical down payment
Remember, even though most landlords put down 6% or less when buying a home with a mortgage, that doesn’t mean it’s the best financial decision for you. At Millennial Homeowner, our goal is to help Millennials become smart, happy homeowners, and that really starts with buying a home you can afford.
Having a solid down payment is a great way to get competitive interest rates and lower your monthly mortgage payment otherwise. If you want to make sure you’re making all the right financial moves when buying a home, check out our home buying guide and workbook in our shop.
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