36% of Recent Home Buyers Put Down More Than 20% at Closing. Should You?

There are pros and cons to making a higher down payment.

For many months now, buyers have faced record-high home prices. And that's made it more difficult to come up with a 20% down payment.

Why is that important? When you take out a conventional mortgage and don't put down at least 20% at closing, you get hit with private mortgage insurance, or PMI. But don't let the word "insurance" fool you. PMI isn't meant to protect you -- it protects your mortgage lender. It's basically an extra fee you pay for not coming up with 20% of your home's purchase price.

But while many buyers struggle to make a 20% down payment, you might be in a position to put down that much -- or even more. A recent report by Hippo found that 36% of recent buyers put down more than 20% when they closed on their homes. But should you make a down payment in excess of 20%? It depends.

The upside of a higher down payment

The more money you put down when you close on your home, the less of a mortgage you'll need to take out. The result? Lower ongoing monthly payments and less money spent on interest.

Plus, you may be more likely to snag a lower interest rate on a mortgage if you're bringing a higher down payment to the table. The more money you put down on your home, the less risk your lender takes on. You may be rewarded for that in the form of a lower mortgage rate.

What’s more, putting down more money at closing means getting to build more equity in your home sooner. That could work to your benefit, especially if a situation arises where you need to borrow against your home equity.

The downside of a higher down payment

Homes are a fairly illiquid asset. What this means is that it's pretty difficult to convert a home to cash -- more so than, say, selling a stock and getting cash for it.

If you make a larger down payment on your home, you'll be tying up more of your money in an illiquid asset. And that could prove problematic if your financial circumstances happen to take a turn for the worse.

Let's imagine you lose your job, only you're left with a small amount of money in savings because you spent most of your money on a home down payment. That could result in you having to rack up unhealthy credit card debt to make ends meet. And even if you don't end up reaching that point -- say, because you can borrow against the equity you have in your home -- it could still make for a pretty stressful situation.

What's the right call?

There's nothing wrong with putting down more than 20% on a home. But it's important to understand the risks of going that route.

If you can afford to make a higher down payment while also leaving yourself with a healthy amount of money in savings, then you may want to go for it. But make certain to retain enough cash to cover a minimum of three months of living expenses. That way, you'll have a decent level of reserves to tap if the situation warrants it.