Why You Should Try To Put 20% Down On A House

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Today's Smart Investor tip comes from a blog post by Kevin Mercadante of Wealth Pilgrim.

Mercadante  says while it's common for homebuyers to purchase houses with minimum downpayment loans of 3% to  5%, saving for longer and putting 20% down offers a host of financial benefits, including improving your chances of a mortgage approval, keeping the mortgage payment low, and eliminating the need for mortgage insurance.

Perhaps most important, making a down payment of 20% provides ample protection against market declines. Below, Mercadante  explains why:  

"We discovered in the last recession – just in case we didn’t already consider the possibility – that property values can fall as well as rise. As a result, millions of people were stuck in homes that they either couldn’t afford to keep(due to a job loss), but could not sell, because the value of the property fell below the outstanding mortgage balance.

For many people in this predicament, the situation was either caused – or made worse – by a minimum down payment made at purchase. A down payment of 5% or less leaves you completely exposed to even small declines in house prices. For example, a 10% price decline can put a homeowner with a 5% down payment into a negative equity position immediately.

By making a 20% down payment, you will minimize both the likelihood and the severity of a price decline to put you into a negative equity situation."  

Making such a substantial down payment also helps you pay the mortgage down faster, and owning your home outright is one of the best ways to prepare for retirement, Mercadante  says.



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