If you’re a regular reader of this blog, you’ve probably heard us advise to put down 20% or more on a down payment if possible. We highly recommend this option if possible…but the truth is that there are some cases where putting down a smaller down payment is a better option for you.
It’s important to note that no homebuyer’s case is identical, and there are a range of factors that will make a difference. Below, we compare the two options. This is not a “Pro vs. Con” battle. It’s “Pro vs. Pro”…but what down payment adds up to more “Pros” for you?
1. BIGGER DOWN PAYMENT PRO: A bigger down payment means a smaller loan balance, and smaller payments.
This is the most obvious, and most straightforward reason for putting down as much as possible.the more money you contribute as a down payment upfront, the less cash you will need to borrow in order to pay for the home. The less you borrow, the lower your monthly payment will be.
For example, if you put down 10% on a $320,000 home, you’ll be paying $800 per-month on average for 30 years on principal alone (and interest will make your average payment much higher). If you put down 20%, you’ll be looking at $711 per-month in principal. That’s $90 in savings on a monthly basis…and if you decide to pay your loan quicker in the future, you can avoid interest payments.
SMALLER DOWN PAYMENT PRO: Does 20% down get you as much house as you want?
Let’s say you’ve set aside $40,000 for putting 20% down on a home. That means you’ll qualify, theoretically, for a $200,000 home. Depending on where you live, that might not get you as much as you want or need. You’ll need $66,220 to reach 20% down on the median home price in Miami. San Francisco? You’ll need $322,000 to put down 20%!
It takes a lot of time to build up a big down payment. It may be worthwhile to put less down to get the house you want. But that doesn’t mean you’ll necessarily qualify for a $400,000 home with a 10% down payment of $40,000. Find a happy medium and put the extra money elsewhere.
BIGGER DOWN PAYMENT PRO: Skip out on mortgage insurance.
One of the most frequently-advertised benefits of putting down more than 20% on a home is that you can dodge required mortgage payments. This policy is built into loans to protect lenders when a borrower defaults. Nobody really “likes” mortgage insurance. You certainly don’t enjoy paying it, and us mortgage brokers would certainly prefer you pay off your mortgage the good old-fashioned way.
SMALLER DOWN PAYMENT PRO: That money may be better used elsewhere.
Sure, there are a number of ways in which a bigger deposit will save you money over the years…but is it the most efficient use for your money? You should look at your mortgage options like an investment: How much do you “gain” by putting more down on a home? For example, using the $320,000 home above, we suggested that you would save roughly $89 per month, totaling $32,040 saved on principal (plus additional interest savings) over 30 years. Sounds great! But what if you put down 10% instead, and invested the rest in a 401k or other investment option?
Again, the “winning” option will differ greatly from scenario-to-scenario, so it’s important to discuss these options with your lender or an investment specialist.
BIGGER DOWN PAYMENT PRO: lower interest rates!
As we explained in the first “Bigger Down Payment Pro,” you’ll pay less per-month simply because you borrowed less. But there are other savings as well! A smaller loan means that you’ll also have a smaller Loan-To-Value ratio (LTV), and this is the main factor when lenders decide what rate they can offer you. A lower LTV means less overall risk for the lender, which means they’re willing to offer lower interest rates for “safer” loans.
There are many things to think about when considering how much you want to put down on a home, and that’s why mortgage lenders are here. We’ll consult with you, determine what you want or need, and guide you to the best option.