Financial Rules of Thumb: 20 Percent Down
Does everyone need to put 20 percent down on a home purchase?
Everyone’s parents and grandparents have passed down the old rule for years that, when buying a home, you must put 20 percent down on the purchase. The idea is that this rule helps keep people from buying more house than they can afford and taking on unmanageable monthly payments.
Now, I’m all for saving and keeping expenses in check. However, for many first-time home buyers, saving 20 percent of a home purchase price is challenging. For some buyers, it might be better to make a smaller down payment now to take advantage of the current historic low interest rates. Delaying a few years to meet the 20 percent rule could mean paying significantly more in interest and possibly nullifying any gains made by the larger down payment.
When working with first-time buyers, I typically advise them to calculate a monthly mortgage payment that’s no more than 25 percent of their gross monthly income. Then, they can be educated shoppers and find a home that fits that budget with the amount they have saved to put down, even if it’s less than 20 percent.
Of course every situation is different. If you’re thinking about buying a home, give us a call so we can help you budget, plan, and find the right house for your family’s unique financial situation. We’re always here to help.