Why is 20% Down Payment the Best

Why is 20% Down the Best Mortgage with the best rate?

Home buyers in Texas putting up 20% down payment on the purchase of their home can get the best mortgage at the best rate.  But why?

Why, since the dawn of mortgage time was 20% the mark and today 20% down helps you avoid the monthly PMI (Private Mortgage Insurance)?  First, I’ll define private mortgage insurance;  Private Mortgage Insurance is basically a monthly payment toward an insurance premium that is designed to protect the LENDER (not you the borrower) in case the home owner/borrower defaults on the mortgage.  I asked that question about 10 yrs ago when I was getting into the business, and an “elder” told me this.  Before there were FHA mortgages or any other type of mortgage that allowed for ‘little or no down payment’, the banker had to figure what cost they might endure when a borrower stopped making payments and they had to foreclose on them to repay themselves using that collateral/property.  Many people do not realize the costs that go into a foreclosure.  Since I’m not an attorney, I won’t try to list the details concerning court costs spent on evicting and filing through the foreclosure portion, but I’ll talk more about the other related costs.  Other honorable mention costs are simply the overhead a bank has to pay in hiring the employees to start the foreclosure process and oversee it, and  hiring an honest Real Estate agent to list the home at the proper value and paying that commission. In the end, the answer to the question, “Why 20%?”  Banks believed it would cost about 20% of the value of the home in costs to evict, pay for foreclosure proceedings, and get the home back on the market and sold.

Lets do a very short demonstration on that note.  So, if someone was buying a $100,000 home, then the buyer would have $20,000 in the home, and the bank would have $80,000…because 20% of $100,000 is $20,000.  Since the bank only needs to recoup $80,000 if the borrower stopped making payments (because that is the amount of money they loaned the borrower), then they could logically sell the home for $100,000 and use the $20,000 for aforementioned costs and still come out of the deal as close to par as possible.

So, how does the PMI or Private Mortgage Insurance work?  (FHA Mortgage Insurance Premium Facts)

My understanding is that the insurance insures the bank/lender on the 1st 20% of that loan when a borrower gets a home loan for more than 80% of the value of that home.  If someone has a better explanation of that, please comment below.

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