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Here’s Why Some California Home Buyers Put 20% Down

When researching the home buying process in California, you’ve probably heard about the “standard” 20% down payment. This figure is commonly mentioned within news reports and housing market studies.

But why? Why do so many California home buyers put 20% down, and is that kind of investment required for all buyers?

The first thing you should know is that a 20% down payment is not required for all mortgage loans and home purchases in California. Lenders sometimes require 20% down or more, especially for larger loan amounts. But many home buyers make a smaller upfront investment.

In fact, the average down payment among home buyers these days is closer to 12%. And the average among first-time buyers in California can be even lower than that. For a conventional mortgage loan, borrowers can make an investment as low as 3%. The FHA loan program allows for down payments of 3.5%.

Benefits of Making a 20% Down Payment in California

Still, the 20% down payment is a common option among some home buyers in California. It’s not always required, but there are certain advantages to making a larger upfront investment.

Here are some of the benefits of making a 20% down payment in California:

1. You can avoid paying private mortgage insurance.

Private mortgage insurance (PMI) is usually required for conventional mortgage loans that have less than a 20% down payment. When the loan-to-value ratio rises above 80%, PMI is typically required.

According to the government-sponsored mortgage buyer Freddie Mac:

PMI is an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

This is the main reason why you hear so much about the 20% down payment. A lot of buyers in California choose to invest 20% when buying a home, because it allows them to avoid paying for private mortgage insurance. Depending on size of the loan, this could save the homeowner hundreds of dollars per month.

2. You might qualify for a lower mortgage rate

Putting 20% down on a California home purchase might help you qualify for a lower interest rate. That’s because mortgage pricing is often based on risk.

When a borrower makes a down payment of only 3%, the loan is covering the remaining 97% of the purchase price. That represents a higher risk, compared to a borrower who puts 20% down. By investing more up front, borrowers can often get a better rate.

3. You’ll end up with a smaller monthly payment.

Not everyone can afford a 20% down payment. In California, especially, home prices can make that kind of investment cost-prohibitive for many borrowers. But the more you put down on a home purchase, the lower your monthly payments will be.

With all other things being equal, a home buyer who invests 20% will have a much smaller monthly payment than one who invests only 5%. Home buyers with more money in the bank often choose to put more money down, in order to reduce the loan amount and the size of their monthly payments.

And this ties into the next benefit below.

4. You’ll reduce the total cost of your loan (i.e., interest).

Interest costs are another reason why some California home buyers make a down payment of 20% (or more). The interest rate is applied to the mortgage loan balance. So a larger loan results in a higher overall interest cost to the homeowner.

By making a larger down payment on a home purchase, borrowers can greatly reduce the amount of interest they pay over time. This could save a homeowner thousands of dollars over the life of the loan.

5. It might make your offer stand out in a competitive market.

California real estate markets can be highly competitive due to limited inventory and strong demand. This is something we’ve written about many times in the past.

Making a down payment of 20% or more on a home purchase in California could help your offer rise to the top of the stack. It might make you more competitive against other buyers – and more appealing in the eyes of the seller.

Buyers who can invest 20% or more are generally considered to be a lower risk, from the seller’s perspective. While the down payment is not a direct measure of a home buyer’s qualifications, sellers often associate a bigger investment with a “stronger” buyer.

This kind of perception might make a seller more inclined to accept an offer with a 20% down payment, compared to one with little or no money down. It could help your offer stand out, especially in a competitive housing market where multiple offers are common.

So there you have them, the top five reasons why some California home buyers put 20% down. It’s not always required, but it has some clear money-saving benefits.

Mike Trejo

Mike Trejo is a Bay Area mortgage broker with 20+ years of knowledge and experience.

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