Figuring out how much of a down payment to make when buying a home can be difficult. It also makes a big difference in how much your home will cost you in the long run including mortgage payments. If you can afford to make a large down payment, should you do it? See the reasons below for why you should make a significant down payment.
1. Easier Approval
Making a large down payment shows lenders that you know how to save which makes you more likely to get approved. Large down payments is one of the best indicators of creditworthiness. Plus, if you are in a multiple-offer situation, having more money upfront might outbid the other buyers.
2. A Lower Interest Rate
The higher your down payment, the lower your loan-to-value ratio is. Banks and lenders usually offer better interest rates when your loan-to-value ratio is low. Having a lower interest rate will also save you a significant amount of money on the life of your mortgage. The other major factor in lowering your interest rate is your credit score, so make sure you know where you stand before you apply for a loan.
3. Lower Monthly Payments
The more money you pay upfront means, the smaller your mortgage payments are. This means more money in your monthly budget for the other aspects of your life and again, fewer dollars of interest paid over time.
4. You Can Be Mortgage-Free Sooner
With more costs covered at the beginning, you may be more likely to pay the entire mortgage off in less time. With lower monthly payments, you might even be able to make extra principal prepayments. Paying off a mortgage early usually makes financial sense and can help you be more prepared for retirement.
5. No Need for Mortgage Insurance
Putting less than 20% of the home price down upfront, lenders usually require that you take out private mortgage insurance (PMI) which protects the lender if you are unable to pay your mortgage payments down the line. The premiums are a cost that you avoid by making a large down payment.
There of course are some reasons not to make a larger down payment including getting a bigger return by investing that money somewhere. It is important to understand, though, that if you can afford a larger payment or are willing to wait to purchase a home so you can save for one, you may end up paying less for your mortgage overall, paying your mortgage off faster and getting better interest rates and terms in the bargain.