Why A 20 Percent Down Payment?
- Date: 2007-08-09 - Word Count: 426
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There are certain pillars in the real estate world that we have all come to know and rely upon. The question, however, is where did those pillars come from. For instance, how did 20 percent come to be the magic down payment number?
In the world of real estate, home buyers know or should know that a 20 percent down payment is a magic number. Why? Well, the payment of such a figure accomplishes two things. First, it lets you avoid the payment of private mortgage insurance. Second, it makes lenders view you with a more lenient eye. If you can manage to bust it up to 25 percent, they will practically throw money at you!
Still, one has to question where the figure of 20 percent came from. After all, why isn't the magic number 15 or 25 percent? At the end of the day, it is a number based on history and experience.
Lenders are always looking at borrowers with a critical eye. They are sizing up your average borrower as a risk. If they lend you money, what is the risk that you will default on the loan and leave them holding the real estate in question? As you can imagine, there are plenty of factors that go into the analysis. Certain factors can be very important to one lender and less so with another. The one factor that makes all lenders pay attention, however, is the down payment.
At its heart, the 20 percent down payment is a tipping point on risk. Lenders have determined over the years and after a few painful experiences, that borrowers who put down 20 percent of the purchase price of a home are far less likely to default than those that put down less money. This should hardly be surprising news. On a $300,000 home, a 20 percent down payment equates to $60,000. It is the rare bird that will walk away from this amount without making a major effort to fix whatever financial problems arise.
At the end of the day, the 20 percent down payment is a tipping point on the teeter totter of risk. If you can raise this amount of money for your home purchase, a lender is less likely to balk at credit issues and so on. The lender will view you more as a partner in the process instead of a potential defaulter, and that is an invaluable position to be in. Saving up 20 percent for a down payment is not easy, but it is well worth doing if you can.
In the world of real estate, home buyers know or should know that a 20 percent down payment is a magic number. Why? Well, the payment of such a figure accomplishes two things. First, it lets you avoid the payment of private mortgage insurance. Second, it makes lenders view you with a more lenient eye. If you can manage to bust it up to 25 percent, they will practically throw money at you!
Still, one has to question where the figure of 20 percent came from. After all, why isn't the magic number 15 or 25 percent? At the end of the day, it is a number based on history and experience.
Lenders are always looking at borrowers with a critical eye. They are sizing up your average borrower as a risk. If they lend you money, what is the risk that you will default on the loan and leave them holding the real estate in question? As you can imagine, there are plenty of factors that go into the analysis. Certain factors can be very important to one lender and less so with another. The one factor that makes all lenders pay attention, however, is the down payment.
At its heart, the 20 percent down payment is a tipping point on risk. Lenders have determined over the years and after a few painful experiences, that borrowers who put down 20 percent of the purchase price of a home are far less likely to default than those that put down less money. This should hardly be surprising news. On a $300,000 home, a 20 percent down payment equates to $60,000. It is the rare bird that will walk away from this amount without making a major effort to fix whatever financial problems arise.
At the end of the day, the 20 percent down payment is a tipping point on the teeter totter of risk. If you can raise this amount of money for your home purchase, a lender is less likely to balk at credit issues and so on. The lender will view you more as a partner in the process instead of a potential defaulter, and that is an invaluable position to be in. Saving up 20 percent for a down payment is not easy, but it is well worth doing if you can.
Related Tags: real estate, payment, purchase, buy, buying, percent, down, 20, twenty
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