Coming up with enough money for a down payment is a challenge for many homebuyers. Mortgage lenders have their own rules regarding down payments, with some requiring a larger percentage down than others. Even if you find a lender that only requires a small down payment, it may be a good idea to put more money down in some cases.
Have Lower Monthly Payments
Making a larger down payment will reduce the amount you will have to borrow, which will translate to lower monthly mortgage payments. If you have substantial savings and a relatively low income, or if you would like to keep your housing payments low and put a chunk of your monthly earnings toward saving for retirement or for your children’s college education, making a larger down payment than you have to may be a smart move.
Pay Less in Interest Over the Mortgage Term
Your lender will consider your loan-to-value ratio when setting your interest rate. A higher down payment will lower your LTV ratio. That will make you less risky to the lender and help you qualify for a lower interest rate.
The amount that you will have to pay in interest will depend on the interest rate and the loan balance. Since putting down a large sum will result in a lower amount borrowed and a lower interest rate, you will pay less in interest in the long run with a larger down payment than with a smaller amount down.
Avoid Private Mortgage Insurance
If you take out a conventional mortgage and put down less than 20 percent, you will most likely have to purchase private mortgage insurance and continue to pay for PMI until you reach 20 percent equity. That will be an extra expense each month and may total thousands of dollars per year. If you can afford to make a 20 percent down payment, you will be able to avoid PMI altogether.
Don’t Put All Your Savings Toward a Down Payment
If you decide to put down more than your lender requires, don’t clean out your savings account. Your lender will require you to have some reserves to cover your mortgage for a few months if you lose your job or have an unanticipated expense. You should also make sure that you leave money in your savings account to cover closing costs, moving expenses, new furniture and appliances, maintenance and repairs after you move in, and any emergencies that may arise.
Compare a Variety of Scenarios
To figure out what to do, consider your financial circumstances and goals and look at several possibilities. An online mortgage calculator can tell you how much your monthly payments would be with various down payments and interest rates so you can choose the down payment amount that works best for you.
