If you have a small down payment, you should read Sethi’s advice before moving forward with homeownership.
- A 20% down payment is ideal for home buyers because you can avoid private mortgage insurance.
- Many people make down payments much smaller than 20%.
- Ramit Sethi of I Will Teach You to Be Rich explained why you need a down payment — and it’s not for the reason you think.
When you get a mortgage to buy a home, you typically still must make a down payment. And, ideally, that down payment will equal around 20% of the value of the home.
If you make a 20% down payment, you can qualify for a better mortgage rate in most cases and may have a broader choice of lenders. Your lender also will not require you to pay for something called private mortgage insurance (PMI), which protects the lender against losses in case of foreclosure when you make a small down payment.
Many financial experts suggest putting 20% down primarily in order to avoid PMI. But Ramit Sethi, a finance expert and author of I Will Teach You to Be Rich, has a different reason for advising that a larger down payment is so important.
Here’s the real reason to put 20% down, according to Sethi
Sethi unequivocally stated on his blog that a 20% down payment is the minimum you should put down when purchasing a property. “If you haven’t saved a 20% down payment, you’re not ready to buy a house,” he said.
He went on to explain that avoiding the added cost of PMI is not the only reason, or even the primary reason, to save so much. “The real reason to save 20% before buying is counterintuitive,” he explained. “Building the habit of saving is critical before you buy and have unexpected housing expenses such as a broken water heater, roof, or unexpected taxes.”
In other words, PMI avoidance is just a secondary benefit of a large down payment. In fact, Sethi said that while you should have the money, this does not necessarily always mean you need to actually put so much cash out before purchasing a home. “I don’t mean that you have to put 20% down,” Sethi said. “In some cases, such as low interest rates, many people intentionally choose to put a small amount down. But you should be able to.”