Is 20% even relevant?

I hate that most of my blog posts focus around home ownership, but I’m not gonna lie, it’s been on my mind a lot lately. Girl Ninja and I are doing our best to save up $100,000 so we can have the freedom and flexibility to buy what we want, when we want it. Working towards a specific dollar amount helps keep our goals clearly defined.

Although we are still another year (or two) away from becoming home owners, we are anticipating the purchase price of our future home will be between $300,000 and $400,000. In order to meet the 20% down payment guideline, we’d need about $60,000 to $80,000 in our future house fund.

If you check out that little savings bar on the right hand side of my blog, you’ll notice the wife and I have $50K in the bank. If we were to buy a $300,000 house today, and we used all $50,000 we have to our name, we’d only be putting down 16.67%. Which, last time I checked is, not 20%.

Continuing on with this game of hypothetical situations…

Putting $50K down on a $300K house, leaves us with a $250K mortgage, or a roughly $1,600 monthly payment (assuming 30 year loan at 4.6%). We were paying $1,500/month in rent for a one bedroom condo down in San Diego, so a $1,600 mortgage payment on a 3 bedroom house sounds pretty darn appetizing…and very reasonable according to my budget. But the 20% Nazis will say I’m not yet ready to be a home owner. Are they right?

My question for you all is simple… Is a 20% down payment still relevant? If you own a home, did you put down 20% when you bought? If you haven’t bought yet, how much do you think you will ACTUALLY put down?

My guess is Girl Ninja and I will put down no less than 10% and no more than 20%, obviously dependent on home price and interest rate on the loan. Who knows what we’ll end up doing, but it’s important to start thinking about these things now. They don’t call me Planny McPlannerson for nothing 🙂

p.s. Girl Ninja has a blog post that will be going up at 10:00 a.m. PST, so be sure to check back in for that.

p.p.s. Her blog post last Friday is now my most popular post of all time….I hate you all!!!

34 thoughts on “Is 20% even relevant?

  1. We put down approx 28% on our $130K 2B/1.5Bath 1200 sq.ft. condo when we took possession in Jan./04; we live about 40 min. outside of Toronto. The money was saved, all cc’s paid off, and we were ready for home ownership.

    We’re looking to list in about a year; with about $3K worth of upgrades/sprucing up we need to do (paint, replace kitchen counter and backsplash…), we’ll be able to list in the low $180K’s… no bad… we’ll put the lion’s share of the $ we get from the sale of our condo towards our next home.

    WAY TO GO GIRL NINJA!!! WOOOO HOOOOO!!!!

  2. Ignore the Nazis. And try to find something in the $200-250K range. Why do you need three bedrooms? Even if you have two kids you can stuff them in one bedroom, and move on to a larger house five years later if needed.

    The difference between 20% and 16.67% is small. Interest rates are at historic lows. Lock in a low rate now and 20-25 years from now payments will seem minimal due to inflation. If I were you, I’d start looking now before interest rates rise, ’cause in the long term you’ll more than make up for that 3.33%.

  3. I bought my first house in January, $154,000 with 20% down ($30,800), with a mortgage payment of ~$630 w/o insurances and taxes. It’s a 4 bedroom 2.5 bath (I live outside Richmond, VA so my prices are probably lower than a lot of places).

    The way I understood it was most banks wouldn’t even consider you unless you had 20% to put down, and this seemed to be the case for me just 6 months ago. There’s nothing wrong with putting less down as long as they’ll accept it and it’s what you want, though. Just do some research, cause no matter what your readers think, they aren’t selling you the house.

  4. In Canada if you put 20% down you avoid having to take out an extra insurance that is mandatory if you do a lower down payments.

  5. We put down 10% on our home or $17K, but that was back in early 2008. It all depends on your mortgage company, if you have a local credit union, they might be a lot more flexible.

    Check out BECU… I used, and still use, them when I was out in Seattle. They were great to work with on other accounts, so they might be pretty flexible on mortgages.

  6. Where I live they charge you PMI (Private Mortgage Insurance) if you do not put 20% down. It’s a significant savings. Like Larry, I would suggest not buying something too big. I sold my big house this past weekend so I could downsize and live life more simply.

  7. We are looking at a house in the 180-220K range and frankly 20% is a little too prohibitive to home ownership. But then again we are REALLY ready to get out of the “rent race.” Larry is right IMO, the difference between 16% and 20% down are pretty small, and PMI is just a minute percentage of all the other costs you’ll have to cover with home ownership… no sense draining your entire savings just to hit the magical 20%.

  8. 20% is to avoid PMI. You calculated your mortgage payment, but insurance will raise your payment. It usually sounds better when calculating than when the actual numbers come back. Just take your time.

  9. We didn’t put 20% down when we bought our house in 1998. I wish I had known then all the information I know now. We didn’t put 20% down because we didn’t HAVE that much. We qualified for much more than we could really afford and ended up losing the house years later.

    Go Girl Ninja!…and I’m fairly certain you don’t hate us. 😉

  10. We just bought a house for 11% down, but are still avoiding PMI because we got a 9% HELOC to cover the rest of the down payment, leaving us with a traditional 80% mortgage. The set-up is very similar to an 80/10/10 loan, which are almost unheard of these days, but we found a mortgage broker that was able to make it happen.

  11. I don’t think that 20% is realistic for most people anymore with how much homes actually cost. I think that have a good down payment is important, but there are other factors that play in – like are your jobs steady, do you have a solid emergency fund it case you lose a job, are both people in the same industry…that sort of thing.

    Jordan and I are putting 5% down and will be just fine 🙂

  12. We’ll be putting as close to 20% down as we can manage, trying to avoid PMI. I realized the other day that with closing costs and all the other expenses for moving, we actually have to save well over 20% before we can buy, which is a bummer. We’ll get there eventually, but there’s going to be some tightening of the purse strings to make that happen.

  13. We have 3 properties and each time we made sure we put 20% or more down. Reasons:
    1) less than 20% will get you PMI, which is a waste of money
    2) some leander will not lend you the money if you don’t have 20%
    3) if the lender will lend you for less than 20%, you will probably have a higher interest rate or cost to get the loan.
    Reason for putting down more is that some lenders will give you a lower rate if you put down 25%(my last one did), and still lower at 30%(this one is rare).

    EX: a $400k house
    15% down with a 320000 loan @4.625 = 1750/mo
    20% down with a 320000 loan @4.625 = 1650/mo
    25% down with a 300000 loan @4.625 = 1550/mo
    25% down with a 300000 loan posibbly @ 4.5 = 1520/mo
    if you put the extra $$ in principal every month, you could pay off the loan a lot earlier, or enjoy the cash flow. Just like credit cards, the money you don’t put down, you’ll be paying interest on it for the duration of the loan.

  14. Everyone says 20% to avoid PMI. However, there is something called lender paid mortgage insurance. It is exactly what it sounds like. The borrower pays a slightly higher interest rate to cover the PMI. This is what I have done (twice). My first rate was 6 5/8 % about 1/4% higher than the option with BMI. Overall we saved a few hundred a month this way. Other added benefit of LPMI: all interest is tax deductible (for now) regardless of income level. BMI is only tax deductible if you qualify (to qualify you have to pay BMI, own a house below some value, and make a small income – basically those who shouldn’t buy houses anyway).

    I did put 10% down when we bought (saved some cash for emergencies which was used for water in the basement a year later). When I refi’d we had about 8% equity for the new loan with LPMI, but we dropped our rate by 2% points.

  15. Don’t forget all those other ownership related costs. Home maintenance isn’t something that you really want to be skimping on, you will pay more just because of the convenience factor of having the work done when you want, not when it MUST be done. Don’t forget the costs of furnishing a larger place and making some renovations over time.

  16. I wouldn’t buy unless I had a 20% down payment and an additional 20% in liquid cash (for upgrades, repairs, and emergencies) in addition to my regular 6-month emergency fund and whatever targeted savings I had at the time for other purchases. But then, I thought the home ownership thing was a racket BEFORE the economy tanked in 08…

    • I agree, Ninja also needs to have an E-fund too match. I would have a one year E-Fund before buying.

  17. I don’t think the 20% rule is as hard and fast as a lot of people would have me believe. It’s all about your personal situation, and sometimes waiting until you’ve got a 20% downpayment would just be stupid. For instance, I recall a finance show once where a couple was trying to get their finances in order to pay down debt and get a house. Their budget was strapped, so saving was tight, but they were about to come into some cash in the form of a gift, that would be an adequate 5% or 10% downpayment on a house. Though they could have afforded the payments on the mortgage comfortably, it would have taken them 2 or 3 years to save up to 20% AND they lived in an expensive city where house prices were constantly rising. The average housing cost would have risen so much in those three years that it would have offset the cost of mortgage insurance on a house they bought today. Know what I mean?

    For me, because I live in an expensive city with astronomical housing AND rent costs, if I’m ever able to buy a house, I don’t know if it will ever be realistic for me to have saved a 20% downpayment. Mortgage insurance or not, as soon as I can reasonably afford the mortgage payments and I feel confident in taking that step, I’m buying a house!

  18. Our first house, we put down 5%. In 7 years we have paid down $70k and have a plan to pay it off by 2020. Our second house, we put down %0 (yes, we did learn a big lesson with that one, even blogged about it somewhere:). Now we have been renting for 4 years and are itching to buy a home. This time we are planning a big down payment and to wait and research A LOT more than we did for the first two. Not necessarily money stuff but location, location, location.

  19. I wouldn’t buy a house for less than 20% down.

    That said, why are you thinking of $300,000. That’s a rather spendy place! You should find lots of very nice places for around $200k within 30-50 minutes of Seattle.

  20. I have bought two houses, and both times have put down 10%. The first one was in 2001 and I only paid $76K for the house. We sold that 4 years later and bought another house for $199K – with $20K down. We were able to get in before the jump in the market so I think it worked for us.

  21. I have put down 20% on most of the houses I am in the process of purchasing from the bank right now. I hate PMI but did have to use it on one of my purchases when I only had 10% at the time.

  22. The home you want will always cost too much. We tend to rationalize mortgages as a necessary step to home ownership, but it shouldn’t be that way. Why not be unconventional and buy a house outright, no closing costs or PMI 🙂
    After putting 50% down on my house with a 15 year note back in 1999, we were able to pay it off sooner because we made some sacrifices. I cannot begin to tell you how liberating it is to be mortgage free and to have 100% equity in our home. Even though I never had student debt I think the feeling is almost the same as when you paid off your student loan. I really hope you two will find a home where you could afford a 50% or more down payment and truly be debt free sooner than later.
    Just remember location, location, location! 🙂

  23. I put 20% down, but that doesnt mean it was the right or wrong thing to do. Of course ignoring PMI is great, but some credit unions dont have PMI to begin with.

    Another reader said the difference between 16% and 20% is so small, which is true if you hash the math out.

    I really liked how one reader said he likes to have the 20% down ready, as well as 20% for unknown costs.

    If I could go back and do it differently, I would have negotiated the price lower and had a few extra grand to start my yearly home upgrades that year, as opposed to the next.

    Ultimately it is your money and your house, you need to crunch the numbers and weigh the pros and cons to make the choice for you and GN.

  24. We put down only 13% on our $175,000 3 bed/2 bath fixer-upper. We were ok with that because we live in “Happy Valley” were home prices are very steady.

    But here is the biggie- we DID NOT have to pay PMI!! How could this be? We went through a local bank (where they won’t sell our mortgage to another company) and they just charged us 1/8 of a percentage point more for the mortgage (which equals like 10 bucks a month or something ridiculously low)!

    I think it all depends on the cost of rent vs. mortgage in the are you live in…but don’t forget to include all the little extras that make homes more expensive (repairs, lawn, higher utilities, decorating, etc.) when you are calculating 🙂

  25. Go FHA put 3% down keep the balance in the account for emergencies. Purchase a good home warranty that can be renewed like from American Home Shield to help. The difference you will pay in payment will take 10 years to recapture. A house of 300k on FHA payment not with PITI is $1875 verses $1600. 75% of the mortgage insurance you pay is refundable when you sell, refiance or pay down the princple to 80%. San Deigo is not a declining market it will have appriciation faster which will help with the mortgage insurance going away. Another thing you have you will benefit from is tax advantages that you do not have now. What little you will save by putting 20% down will be wiped out by higher prices, interest rate and lack of tax advantages. Why wait?

  26. I put 20% down on my first home in 2007 and then got unexpectedly relocated the next year and had to sell (did not even know there was a possibility I could be relocated). Home prices had begun to fall, and I lost a big chunk of my investment.

    On the home I had last year, I got an FHA loan and only put down 5%, at the advice of several mortgage folks. It drove me crazy not to do 20% but their rationalization was it was better to keep my assets fluid right now than tied up in a mortgage on a house that I might not live in for more than five to 10 years (my husband and I are still young and without children). My house was relatively cheap, so the PMI didn’t make a huge difference on my monthly payment, and their advice on keeping my assets fluid has turned out to be good advice.

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