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Down Payment: Separating Fact from Fiction

A 2015 survey conducted by Ipsos Public Affairs and Wells Fargo Home Mortgage revealed that 36% of people believed a down payment of 20% was a must for buying a home. This is not at all the case, though. It all depends on the individual, his or her credit, and the lender.

What Are the Real Numbers?

Statistics from the same time frame as the study revealed that the average down payment reported by new homebuyers was just under 15%. A year prior, that number was 15.5%. In fact, according to Freddie Mac, about 40% of all homebuyers put down less than 10% on the overall value of their homes. In fact, the lender allows people to put as little as 5% down, and people who qualify for FHA loans can purchase their homes for as little as 3% depending on the circumstances.

down payment 300x188 Down Payment: Separating Fact from FictionWhat About Luxury Homebuyers?

Things are a bit different when it comes to buying luxury homes, though. Oftentimes, the purchase prices for these homes are more than a million dollars, and this means that lenders must be especially careful about providing mortgages. In these cases, it isn’t uncommon to see lenders asking for as much as 30% down. However, individuals who have excellent credit and a solid track record with previous real estate can often purchase homes for about 15% down, depending on the lender. This is especially true if the purchaser applies for his or her mortgage through the same bank through which most of his or her wealth is managed.

Benefits of a Larger Down Payment

In most cases, if you can put down a larger down payment, you should. The primary reason is obvious; it saves you thousands of dollars in interest charges over the course of your 15- or 30-year mortgage. However, a large down payment can also benefit you in other ways.

  • Smaller Monthly Payments – Smaller monthly mortgage payments are convenient. They allow you to better manage your wealth, and they free up more of your funds for everything from vacationing to investing.
  • No Need to Purchase Private Mortgage Insurance – People who put down less than 20% on their homes are often required to purchase private mortgage insurance, or PMI. Essentially, it means you’re paying to protect the lender in the event that you default on your payments. If you’re asked to purchase PMI, expect to pay .5% to 1% of the total loan amount, which can mean thousands of extra dollars per year – especially for luxury homebuyers.
  • Better Chance to Get the Home – Although luxury homes don’t move as quickly as more traditional family homes, having a larger down payment can give you a significant advantage in a multi-offer situation. If someone else makes an offer on the home, the seller will look at who is most likely to close the deal with their lenders, and the seller will also look at who will close the fastest. Nine times out of 10, that person is the one with the larger down payment.

The truth is that you may not need a 20% down payment to get the luxury home you want. However, there are certainly some benefits to providing at least that amount, and maybe more. Some lenders may require 30% depending on your credit history and your experience in the real estate market, too.

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