A down payment is a percentage of a home’s purchase price that is paid upfront by a property buyer before purchasing a home. The down payment determines how much buyers in Illinois will need to borrow from their lender as well as whether they will need to pay private mortgage insurance, what type of loan is best suited to their needs and the interest rate on their mortgage.

Loan-to-value ratio

The amount buyers put down on a home helps their lender determine the loan-to-value ratio, or LTV. This, in addition to factors like credit score and debt-to-income ratio, is one of the most important things that a lender considers when determining whether to offer buyers a mortgage. This ratio expresses how much buyers will owe on their home after the down payment is made.

The benefits of putting down 20 percent

Typically, property buyers are expected to put down 20 percent of the value of the home they wish to purchase. While this is not always required, there are many benefits associated with making a 20 percent down payment. These include the following:

  • Putting this much down on a home can improve property buyers’ chances of actually getting a mortgage.
  • A larger down payment is associated with a smaller monthly mortgage payment.
  • Buyers who put down 20 percent often get lower interests rates, reducing the amount of money they pay for the home overall.
  • Putting down this amount allows buyers to avoid the need to pay for private mortgage insurance.

Additionally, when buyers make a 20 percent down payment, they are able to build instant equity in their home and safeguard themselves against temporary downturns in the market.

Factors to consider

While those buying a house can benefit from making a 20 percent down payment, it is not always the right choice for every buyer. When buying a new home, property buyers should consider their lender’s requirements and what a higher or lower down payment will mean for their personal situation. For example, buyers should think about whether making a smaller down payment and paying private mortgage insurance is worth it to them or if they would be better off saving for a larger down payment and waiting to purchase a home.

During the purchasing process, buyers may have a difficult time determining how much they should put down on their mortgage. Those in the midst of this process may benefit from speaking with an attorney who can help them understand the legal repercussions of making a smaller or larger down payment and what is best for them.