A low-down payment is commonly advertised as a benefit when it comes to home loans (or any other type of financing for that matter). The idea of paying little or even nothing upfront is certainly appealing—but is it always the best option? Let’s look at the pros and cons of putting down a large down payment on a home.
Drawbacks of a Large Down Payment
Here are some of the negatives which go with a large down payment on a home:
- You will lose liquidity in your finances. If your finances are relatively tight right now, you may only have so much money in the form of cash reserves. If you put a large chunk of it into your down payment, you may not have as much available in case of emergencies. You may also need to be more careful with your monthly budgeting. In some cases, this can be very inconvenient.
- The money cannot be invested elsewhere. While a home is an investment, the money that you put into your down payment is unavailable for other forms of investing. You cannot use it to trade stocks or other assets, nor can you use it to fund a business venture. It is locked in the house. This may limit opportunities to earn toward your future.
- It is inconvenient if you will not be in the house for long. If you only are going to stay in the house for a few years, it may not make much sense to tie up a substantial portion of your finances in it. You do not plan to make the home a long-term investment, so pouring cash into it just isn’t all that logical.
- If the home loses value, so does your investment. While ideally, we hope that the properties we invest in will rise in value, that does not always come to pass. You may find yourself in a situation where you would prefer to sell the home before its value plunges further. The less you have invested in it, the lower your losses will be.
- You might not have the money to begin with. Finally, there are situations where you may not be able to afford a large down payment at all. It may be outside of your financial needs. That is why programs like HOME READY and FHA loans with low down payments are well-suited to first-time homebuyers who may not have much money stockpiled yet.
Advantages of a Large Down Payment
While there are a lot of upsides to a low-down payment or no down payment, there are also financial benefits to contributing as much of a down payment as you can afford. Here are a few:
- You represent a lower risk and may command a better interest rate and more favorable loan terms. When you invest more in a home, lenders feel you are less likely to default. First, you have demonstrated financial means. Secondly, you are already invested in the home, which increases your motivation. Thirdly, the amount left to be paid off is smaller, so you are more likely to be able to follow through, even if there are unexpected changes in your future.
- You can buy a more expensive home. It is common for jumbo loans to carry higher down payment requirements. If you are in the market for a luxury home, being willing to pay a larger down payment could help you qualify for a jumbo mortgage on the home of your dreams.
- You will be able to pay the mortgage off sooner, saving money on interest. This is a very good reason to try and make a large down payment. It could end up saving you thousands of dollars over the long term. If it does not jeopardize your finances in the present, it makes good financial sense to spare yourself those unnecessary payments in the future.
- Your monthly payments will be smaller. Another benefit of paying as much of your mortgage as possible in advance is that the monthly amount you pay going forward could be significantly reduced. This not only can make it easier to manage your finances in the future, but it can also reduce the amount of stress you feel when you are handling your regular budgeting.
- You may be able to skip paying for private mortgage insurance (PMI). Finally, if you make a very low-down payment, you may be required to pay each month for PMI. This too can add up to a lot of money over the years ahead.
The Best Down Payment Amount is Whatever Is Right for Your Financial Situation
So, should you opt to make a large down payment on your home? It all depends on your financial situation and goals. If you do not have a lot of savings right now, a large down payment may restrict your budget too much. If on the other hand you can afford a large down payment, you will potentially save a lot of money in interest and PMI payments, and your monthly mortgage payments will be more manageable.
Have questions about down payments? Grandview Lending is here to help. Please give us a call anytime at (317) 255-0062, and we will walk you through everything you need to know about down payments.