When people want to buy a house, they usually need to save money for a down payment. A down payment is the first amount of money you pay when you buy something big, like a home. Many people ask, “What Are Two Benefits of Saving at Least 20% Down?” This is a great question to ask, especially if you’re planning for the future. Saving 20% before buying a house might sound like a lot, but it actually helps in many ways.
In this blog, we will explain what a down payment is, and more importantly, we will show you the two main reasons why saving at least 20% can really help you when buying a home.
What Is a Down Payment?
A down payment is the money you pay upfront when buying a house. The rest of the cost is usually paid using a loan from a bank, which is called a mortgage. The bigger your down payment, the smaller your loan needs to be.
For example, if a house costs $200,000 and you pay $40,000 as a down payment, that’s 20% of the price. The bank will then lend you the remaining $160,000.
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Why 20% Is an Important Number
People often talk about 20% because it is seen as a safe and smart amount to put down. It shows the bank that you are serious and responsible. It also comes with several financial benefits. Now, letβs look at the main question: What Are Two Benefits of Saving at Least 20% Down?
Benefit 1: You Donβt Have to Pay Private Mortgage Insurance (PMI)
What Is PMI?
PMI stands for Private Mortgage Insurance. It is a fee that banks charge people who do not pay at least 20% as a down payment. The bank wants to protect itself in case you cannot pay your loan, and thatβs why they add this extra fee.
How Much Is PMI?
PMI can cost between 0.5% to 1.5% of your loan amount every year. If your loan is $200,000, you could be paying $1,000 to $3,000 every year just for this insurance.
Why Is Avoiding PMI Good?
- You save money every year.
- Your monthly payment is lower.
- You can use that money for other needs like repairs, furniture, or savings.
So, by saving at least 20%, you avoid this extra cost completely.
Benefit 2: You Borrow Less and Pay Less Interest
Smaller Loan Means Smaller Payments
If you save more money before buying, you donβt need to borrow as much from the bank. This means your loan will be smaller.
Using the same example:
- House price: $200,000
- Down payment: $40,000 (20%)
- Loan: $160,000
If you only had $10,000 saved:
- Down payment: $10,000 (5%)
- Loan: $190,000
A bigger loan means you have to pay more each month and pay more in interest over time.
Less Interest Over Time
Interest is the extra money the bank charges you for borrowing money. The more you borrow and the longer it takes to pay back, the more interest you pay.
Letβs say your interest rate is 4%:
- For a $160,000 loan, over 30 years, you might pay $115,000 in interest.
- For a $190,000 loan, over 30 years, you might pay $136,000 in interest.
So, by borrowing less, you save a lot of money in the long run.
Other Good Reasons to Save 20%
Besides the two main benefits (no PMI and less interest), here are a few more good things about saving 20%:
- Better loan approval chances: Banks are more likely to say yes to your mortgage.
- Lower monthly payments: Since you’re borrowing less, each monthly bill is smaller.
- More home choices: Sellers may trust buyers who offer a large down payment.
How to Save 20%
Saving a big amount like 20% of a house can be tough. But with a plan, it’s possible. Here are some tips:
- Set a savings goal: Know how much 20% of your target home price is.
- Make a budget: Track where your money goes and try to save more.
- Open a special savings account: Keep your house money in a safe place.
- Cut extra spending: Avoid buying things you donβt need.
- Take your time: It might take a few years, and thatβs okay.
Example: Sarah vs. Mike
Letβs look at two friends, Sarah and Mike, who both want to buy a house that costs $250,000.
- Sarah saves 20% ($50,000). Her loan is $200,000. She doesnβt pay PMI and gets a good interest rate.
- Mike saves only 5% ($12,500). His loan is $237,500. He pays PMI every month and more interest over time.
In the end, Sarah saves tens of thousands of dollars just because she waited and saved more.
Saving Can Help You Avoid Stress
When you borrow less money, you feel less stress. You donβt have to worry as much about big monthly payments. You also feel better knowing that you own more of your home right from the start.
Being prepared with a 20% down payment gives you confidence and peace of mind.
Down Payment Assistance
Some people may qualify for help with their down payment. There are programs that help first-time home buyers. But even if you get help, saving as much as you can is still smart.
Look for help from:
- Local government programs
- Nonprofit housing groups
- Employer benefits
But remember, even with help, you should try to save as much as possible.
Common Myths About Down Payments
Myth 1: You must have 20% to buy a house.
- Not true. You can buy with less, but it will cost more in the long run.
Myth 2: It’s impossible to save that much.
- It might be hard, but with a plan, anyone can do it.
Myth 3: PMI is not a big deal.
- Actually, it adds a lot to your costs over time.
What Happens If You Donβt Save 20%?
If you donβt save 20%, you can still buy a home. But you will:
- Pay PMI
- Have a bigger loan
- Pay more interest
- Have higher monthly payments
You might also get a lower chance of approval from lenders.
Final Advice
If you are thinking about buying a home in the future, start saving early. Even if 20% feels like too much right now, setting small goals will help you get closer. Every dollar saved is a dollar less to borrow.
Talk to a financial advisor or trusted adult to help you plan. Ask questions and learn about how home loans work. The more you know, the smarter your decisions will be.
Also read: Why Does the 30-year Mortgage Cost So Much More Than the 15-year?
Conclusion
So, what are two benefits of saving at least 20% down? First, you can avoid paying private mortgage insurance (PMI), which saves you money every year. Second, you can borrow less from the bank, which means lower monthly payments and less interest paid over time. These two reasons show why saving a big down payment is a smart and powerful choice. It helps you own more of your home right away and gives you financial peace. While it might take time and effort, saving 20% is worth it in the long run.
Start planning today and take smart steps toward buying your dream home tomorrow.