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Buying a home: Keep 20 percent in mind

If you haven't heard about the 20 percent rule when it comes to buying a home, you are likely not alone. However, this rule can be a huge benefit to ensure that the home you purchase isn't too expensive or too big. Here's how the 20 percent rule works.

  • Take 20 percent of the loan for which you're approved. When buying a home, you will probably have a number that you feel you can afford. The bank will provide you with a different number that you can afford. When you learn how much you are preapproved for, in terms of your mortgage, you should borrow 20 percent less. This means you will have more cash to save for unexpected expenses, such as home improvements. You won't be at the top of your financial limit, either.

  • Put 20 percent down. If at all possible, put down 20 percent of the home's price. This will help keep your mortgage payments lower and more affordable. You can also start out with some equity in your home and you won't be paying out as much interest on the loan.
  • Get 20 percent more space in the home. While you may think that you can be comfortable in a home that is 2,000 square feet, it's best to get a home with 2,400 square feet, especially if you are young. Your family might continue to grow and you don't want to have to move again within a couple of years. If your children are out of the home, then consider purchasing a home that is 20 percent less than what you previously had. You'll pay less in utilities and you'll have more money to explore the world outside of your home.

When buying or selling a home, it's important to rely on the advice of a real estate attorney, too. He or she can provide the guidance you need to make sure all the paperwork is correct and to ensure there are no issues that will cause future problems.

Source: Nerd Wallet, "Use the 20% Rule to Guide Real Estate Decisions," April 21, 2016

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