If you are like many of the potential home buyers out there, chances are you have probably heard time and time again, that it is best to wait until you have saved up enough for a 20% down payment before buying a home. While this can definitely help you achieve the purchase of you home, this does not have always have to be the case. In fact, another take on this approach to home ownership which has emerged from time to time over the years, alternatively suggests that maybe you shouldn’t wait until you have saved this amount.
Over the years, while some home buyers have chosen to stick with this 20% approach – and on the other hand, some have not – their home buying experience, however still moving smoothly as they opted instead to either put down less of a down payment or – none at all. That being said, it is important to note that many banks will request that buyers make a down payment of at leaf 5% – particularly when it is for the purchase of their first home.
Whether or not you are leaning towards one method of home ownership over the other – you may still want to be aware of the potential pros and cons of each scenario and then you can more clearly identify what either course of action will mean for you and your finances. Even more so, if you have debts and are trying keep your credit is good standing – then you will want to examine which method may be better for you now as well as in the long run.
Reasons FOR making a 20% down payment when buying your home:
Earn Instant Equity: By putting down a decent down payment of at least 20%, this means you are moving into your home with more equity than what you would have otherwise. Ultimately, this can also help you grow your financial wealth in less time. Without making a sizeable down payment – you are likely to take longer to pay off your loan, and the longer you are a mortgage borrower the less home equity you actually own.
Obtain Favourable Loan Terms: You are also more likely to secure more favourable loan terms when you make a 20% down payment, as lenders will typically offer a lower interest rate to borrowers who provide more money upfront. From the other perspective, if you don’t make this initial 20% payment, lenders may also up your premiums in the event you default on your loan payments.
Have Lower Monthly Payments: You are probably also aware that by making a down payment of any size can lower the amount of your monthly mortgage payments. By making a down payment of 20%, this can make your payments smaller than if you provide a lower down payment upfront and of course by not making one at all. In the end, this can free up some extra money for you each month and can also keep your housing debt levels lower.
As you can see, there are definitely some valid reasons for waiting until you can make a 20% down payment on your home – however, this story would not be complete without addressing the positives associated with not following this course of action. Please read on to learn more about the other side of this overall home buyer’s scenario.
Reasons AGAINST waiting to save 20% down payment when buying your home:
Your Savings will Take a Major Hit: To put things into perspective, in order to save enough to make a 20% down payment – for most people this will typically mean that they will need to save as much as $20 000 to even $70 000. If you have saved this amount, that’s great – however, forking out this much cash all at once will definitely cut into your savings – even wiping them out completely.
It Can Take a Long time to Save this Amount: If you are looking to buy a home and you are trying to save up for the 20% down payment, the downside of this – albeit, committed line of thinking is that it can take you far too long to save this amount of money. Perhaps, instead you may decide to move forward with buying your home by making a lower down payment – and in combination with lower interest rates, this can also be a good reality to take advantage of, in order to save some extra money on your loan payments as well.
You May Not End Up Saving as Much Money in the Long Run: As it turns out, while you are likely to save some money over time by making a down payment of up to 20%, realistically, this amount may only end up being a difference of a few thousand dollars. As such the conditions of the Canadian housing market, as well as the current interest rates have appeared to narrow the margins between those who will make a 20% down payment and those who will not.
Therefore, if you are looking to buy a home now and waiting to save enough is just not be an option – then as it stands you may not be hit as hard over time in your payments and you may also not even save enough to make waiting even worth it.
Ultimately, the point here is not saying that if you are able to make the down payment, you shouldn’t – however what is instead suggested is that if you are putting off buying the home you want because you are waiting to save the money – then perhaps moving forward with this purchase even though you don’t have the full down payment amount may actually be a better decision for you.
All in all, you will still want to weigh the pros and cons and see how they may align with your current housing needs, as well as where your finances are at this point in time. Again, not to discount the sound and strategic value in waiting to save an appropriately -sized down payment – however it is also important to keep in mind that your home ownership goals do not always have to follow along with this same pattern.
