Home Mortgage Loans: Is 20% Down Dated Advice?
If you’re ready to buy your first home, you’ve likely heard that a 20% down payment on a mortgage is pretty standard. But given that as of July 2016 the median price of a home in the U.S. was $294,600, that can be a substantial chunk of change—$58,920 to be exact. Heck, that’s enough for an all-frills wedding, a Model 3 Tesla and a sweet honeymoon, or maybe even for a small private island in Nova Scotia.
But is the 20% down sage advice or an opinion that’s no longer relevant? Just last year, the average down payment on a single-family home was 14.8% (via RealtyTrac). So, times are a changin’.
Still, why does 20% seem to be the magic number?
The simple answer is that there are clear advantages to putting down that much. For example, it’s normally easier to secure a mortgage with better terms and a lower interest rate when putting down a larger amount. Plus, with a 20% down payment, you don’t have to buy private mortgage insurance (PMI), which can cost anywhere from .5% to 1% of your total loan amount. And then there’s the most obvious perk: you’ll owe less on the total cost of the home, which means lower monthly mortgage payments.
But let’s face it: Even if you’re making a decent—heck, a pretty awesome—salary, saving up 20% of the total cost of a home can be difficult, especially if you’re juggling students loans and trying to reach other long-term goals, including saving up for a retirement. Today, it can seem that the goal of owning your home is close to impossible.
But think again.
It might just be more beneficial to put down less than 20% on your dream house. Consider the following:
You want to preserve your nest egg
Putting 20% down on a home might force you to rely heavily on funds you’ve worked hard to save, and that’s not in your best interest. Remember, you can borrow to pay for school, a new car, and a home, but you can’t borrow for retirement. So dip only slightly into your savings if you must.
While you can withdraw up to $10,000 from a traditional or Roth IRA without penalty to buy your first home, there are taxes to consider. With a traditional IRA, you have to pay taxes on the amount you withdraw, but with a Roth IRA, no taxes will be due if you’ve had the account for at least five years. This strategy could help you in the long run, especially if you expect income boosts as you make strides in your career.
Your other big-ticket goals won’t be in limbo
By putting less money down on your home, you’ll be able to make headway on your short-term financial goals, such as paying off student loans and credit cards, and your long-term goals, such as retiring and perhaps saving up for that trip to Cuba.
You’ll also be able to invest more, which will help you grow your hard-earned cash and, in turn, keep living expenses low during retirement.
Modern options exist
Not every finance company is out to get you. In fact, SoFi puts its members first, because when you meet your goals, we meet ours.
With SoFi, your down payment on a mortgage up to $3 million can be as low as 10%. And if you’re looking to keep your monthly payments low, consider our interest-only loan offer, where your down payment can be as little as 15%. Whereas most other lenders only look at a credit score, our underwiting approach also considers employment history, debt payment record, and cash flow.
The magic percentage depends on you
Putting 10% down on a home isn’t for everyone. But if you’re in a great place in your career and still moving up, it might be right for you. It could allow you to get in the market early if you live in a popular city where you pay high rent or where home prices have soared in recent years. Renting in the Bay Area? 10% down on a new home might be a great option. Jaded at how home prices have skyrocketed in Tampa-St.Petersburg? Saving for 10% down might just be your golden ticket to a new home .
And just like when searching for the perfect home, when it comes to landing on down payment percentage, you need to find your perfect fit—there’s no one size fits all. So do your homework and weigh all the pros and cons to choose what works best for you.
Eager to get a jump on the home-buying process? Dig into SoFi’s Home Buyer’s Guide, and then discover your rate on a SoFi mortgage loan in less than two minutes. We’re on your side to put you in your dream home sooner, rather than later.