Why You Should Try To Put 20% Down On A House

Today's Smart Investor tip comes from a blog post by Kevin Mercadante of Wealth Pilgrim.

Mercadante says while it's common for homebuyers to purchase houses with minimum downpayment loans of 3% to 5%, saving for longer and putting 20% down offers a host of financial benefits, including improving your chances of a mortgage approval, keeping the mortgage payment low, and eliminating the need for mortgage insurance.

Perhaps most important, making a down payment of 20% provides ample protection against market declines. Below, Mercadante explains why:

"We discovered in the last recession - just in case we didn't already consider the possibility - that property values can fall as well as rise. As a result, millions of people were stuck in homes that they either couldn't afford to keep(due to a job loss), but could not sell, because the value of the property fell below the outstanding mortgage balance.

For many people in this predicament, the situation was either caused - or made worse - by a minimum down payment made at purchase. A down payment of 5% or less leaves you completely exposed to even small declines in house prices. For example, a 10% price decline can put a homeowner with a 5% down payment into a negative equity position immediately.

By making a 20% down payment, you will minimize both the likelihood and the severity of a price decline to put you into a negative equity situation."

Making such a substantial down payment also helps you pay the mortgage down faster, and owning your home outright is one of the best ways to prepare for retirement, Mercadante says.