3 Reasons Suze Orman Says You Shouldn't Buy a House Without 20% Down
KEY POINTS
- Most home buyers need to make a down payment.
- Putting 20% down can help borrowers qualify for a loan with more lenders and at better rates.
- Suze Orman provides several reasons a 20% down payment is ideal for home buyers.
Will you regret buying a house with a small down payment?
Traditionally, most home buyers made a 20% down payment when purchasing a property. This meant for each $100,000 their home was worth, they put down $20,000. This has become quite challenging for some buyers in expensive parts of the country. A growing number of lenders offer loans with far less than 20% down, so this standard deposit isn't nearly as common anymore.
If you're considering putting less than 20% down on a property, though, you should be aware of some of the big potential downsides. Finance expert Suze Orman has pointed out several key reasons why buying a home with a smaller down payment could be a mistake, including the following.
1. Your interest rate will be higher
The first major reason why Orman urges home buyers not to purchase a home with less than 20% down -- even if lenders allow them to -- is because loans with lower down payments usually come with higher interest rates.
Interest is the cost of borrowing. Lenders charge higher costs for riskier loans, and low down payments undoubtedly carry more potential risk for lenders. If your interest rate on your home mortgage is higher because of a small down payment, each monthly payment for your loan will also be higher -- as will your costs over time.
With a loan paid off over a long time -- and especially one for a larger amount -- even a slight bump in rates due to an insufficient down payment could end up costing tens of thousands of dollars in extra money during your repayment period.
2. You'll need to pay for private mortgage insurance
As Orman points out, almost all loans that allow borrowers to make a small down payment come with an added cost. The exception is VA loans.
This added cost comes in the form of mortgage insurance. Mortgage insurance doesn't insure you against losses -- despite the fact you pay for it. Instead, it makes sure the lender doesn't face financial loss.
See, one big risk of a small down payment loan is that the home won't sell for enough to cover all the costs if you don't make payments and the lender has to foreclose. Mortgage insurance protects the lender from losing money in these circumstances. But, although it doesn't help you as a borrower to avoid foreclosure, lenders will require you to pay for it.
Because of both the higher interest rate and the mortgage insurance premiums, Orman points out that "low down payment mortgages end up costing you a lot."
3. You may end up buying before you're financially ready
Finally, Orman indicates the last big reason you need a 20% down payment is because amassing this much money requires "patience and resolve." You'll need both of those as a homeowner to ensure you have the funds needed to pay off your loan for decades and to ensure you can fulfill the responsibilities of owning the property.
For all of these reasons, it's a good idea to follow Orman's advice and to make sure you have at least 20% of your home's value to put down before you commit to buying a property of your own.
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