What Are the Benefits of Putting 20 Percent Down on a Home Loan?

A lower loan-to-value ratio helps your chances of getting approved for a home loan.

Putting 20 percent toward your home loan lowers your monthly mortgage payment. A 20 percent down payment brings your loan-to-value, or LTV, ratio to 80 percent. This saves you from having to pay private mortgage insurance, or PMI, which protects the lender in case you default. Therefore, the LTV ratio is an important criteria in the loan approval process. A lender may even deny your loan if you put down less than 20 percent.

Less Borrowing Is Better

In the eyes of a loan officer, your 20 percent down payment translates into a lower monthly mortgage payment, which lowers the chance that you'll default. Assuming everything else checks out --- such as your credit and work history, personal income and current debt burden --- your application is given more weight than a competing offer for a loan on the same property where the borrower is putting down less money. From the lender's perspective, the less money it needs to lend to you, the better.

Lower Mortgage Payments

Your mortgage payments are lower than if you put down less than 20 percent. For example, 20 percent down on a $200,000 home is $40,000, leaving a loan amount of $160,000. Assuming a 30-year mortgage at an interest rate of 5 percent, this translates into a monthly payment of $859, excluding fees and other related expenses. The monthly payment for a 10 percent down payment, however, is $966; it's $1,020 with just a 5 percent down payment.

Lower Debt-to-Income Ratio

A 20 percent down payment on a home loan provides you with a larger operating cushion and saves you from paying PMI, which can cost as much as $25 to $65 per month on a $100,000 loan. This is extremely important given the other related expenses you take on when buying a home. Lenders don't like to see high debt-to-income ratios. A mortgage of more than 30 percent your monthly income may be considered too high.

Less Paid Over Life of the Mortgage

Another benefit of putting down 20 percent is that you have less to pay back in principal and interest over the life of the mortgage. Using the previous example, on a $200,000 home, you will have paid $309,209 in 30 years compared to $347,860 if you put down 10 percent, and $367,186 with a 5 percent down payment.

References

• National Mortgage: Down Payment