4 Reasons to Make a Large Down Payment

When planning a home purchase, you’ll have to decide how much to set aside for the down payment. There are several low-down-payment mortgage options and down payment assistance programs available for qualified buyers, but what if you have the financial wherewithal to put down 20 percent or more? Should you do so?

Unfortunately, the answer isn’t so simple. How much to put down really depends on current market conditions and your financial circumstances. However, there are definite benefits of a larger down payment. Let’s take a look at just a few of those advantages.

No mortgage insurance premiums
The less a borrower puts down, the higher the risk they appear to the lender. Private mortgage insurance (PMI) serves as protection for the lender’s investment, should the borrower default on the mortgage. Lenders require PMI whenever a borrower puts down less than 20 percent, and typical rates run about .5 to 1 percent of the loan balance per year, but it could be a bit higher or lower depending on your financial profile. Read on for an example of how PMI can impact your overall costs.

Smaller loan balance
Remember, the less you borrow, the less you’ll have to pay back. And, the more you pay up front, the lower your monthly mortgage payments. Keeping your monthly payments manageable can make things easier should you experience a sudden life change, like the loss of a job. And, a smaller loan balance and lower payments also gives you the ability to pay off your mortgage faster.

Lower interest rates
A larger down payment also often results in a lower mortgage interest rate. Jennifer Layman, senior loan officer with CrossCountry Mortgage, Inc., says this goes back to the risk factor.

“Loans with a down payment of 25 percent or more tend to get the best rates and terms,” she said. “However, other qualifying factors, like credit and debt-to-income ratio, can also affect terms and rates, so it’s important to look at the overall financial picture.”   

Less spent on interest
A smaller loan balance and a lower interest rate means you’ll pay less interest over the life of your loan. While this may not have a major impact on your finances today, it can make a big difference in the long run.

To put this into perspective, let’s say you’re purchasing a home for $200,000. If you increase your down payment from 10 percent ($20,000) to 25 percent ($50,000), you could potentially save ¼ percent in your interest rate, lowering the monthly mortgage payment by $169.37. With 25 percent down, you would also dodge PMI, which saves you an additional $40.50 each month, bringing your total monthly savings to $209.87.

“The real impact is realized when you look at the amount saved over the 30-year loan period,” said Layman. “Not having to pay PMI along with the reduced interest rate means you could save $96,805.99 over the long term, which is a large chunk of money that could be used for retirement or other investments.”

In addition to these benefits, putting down 20 percent or more on a home can potentially protect you from unexpected price declines — a larger down payment minimizes the likelihood and severity of a price decline putting you into a negative equity position.

“A larger down payment can also give you an advantage in a competitive market,” said Layman. “In a multiple-offer situation a seller may look beyond just price and consider which buyer is most likely to successfully close the deal. A borrower with a conventional loan and larger down payment can appear to the seller as a stronger buyer.”

While these are all great advantages, saving 20 percent for a down payment may seem like a pipe dream to many hopeful homeowners. Veritas Urbis Economics recently put together some approximations on the length of time needed to save for a sizable down payment. The study, based on a middle-class salary and the purchase of a median priced home (currently around $252,000), found that if you save at least 10 percent of your income, it will take the better part of a decade to accumulate $50,500 for 20 percent down. For those who don’t want to wait that long, a low-down-payment conventional or government-backed mortgage may be the way to go.

And, even if you do save a significant amount for your down payment, it can be scary to part with all of it. Putting down a smaller amount means you can keep some of your money for emergencies, put it towards retirement, or even use it to make improvements to your new home.

“Which loan program to use and how much to put down is specific to each individual’s situation,” said Layman. “An experienced, local lender will talk through your concerns, go over your financial profile, and ask about your short- and long-term goals to help determine the right course of action.”

For a list of professional area lenders, visit the Greater Lansing Association of REALTORS^® website at www.lansing-realestate.com.