Traditional financial advice says to have a down payment of at least 20% when buying a house. But is this still necessary today?
Where did the 20% rule come from?
If you’ve gone through the mortgage process, you’ve likely heard the term “FHA.” The Federal Housing Administration (FHA) was created after the Great Depression. Much like the recent Financial Crisis, the Great Depression caused a wave of foreclosures and lending was halted as banks went out of business.
The goal of the FHA was to stabilize the mortgage market and set standards for mortgage lending. One way the FHA did this was to insure mortgage loans only if the borrower had at least a 20% down payment. By the 1950’s, this “20% down” rule became a standard of the entire mortgage industry.
Do I still need a 20% down payment?
The “20% rule” is no longer required. In fact, today you can get a mortgage for as little as 3.5% down. But is it beneficial to save up for a larger down payment?
If you don’t have at least 20%, you will pay an additional mortgage cost called “private mortgage insurance” (PMI). This is because your loan is seen as riskier for the lender, in the event you default on your loan. However, it’s not as important to have 20% down as it used to be!
PMI was much more expensive than it is today. In addition, not putting 20% down meant your interest rate was significantly higher. While there is still great benefit to having no PMI, the advantages of a 20% down payment aren’t what they used to be.
Be wise with your assets.
This means doing what’s best for your financial goals. The decision of what to put down on a new house is personal to your financial situation. Even Dave Ramsey recommends a 10% down payment if you haven’t reached the 20% goal after several years of saving.
At Stewardship, we have wise advisors that are here to help you make sense of different options. If you’re looking to buy a new home, schedule a time to meet with one of our Stewardship Mortgage advisors.