Buying a home is a big decision jam-packed with smaller, yet equally important, other decisions. What neighborhood is best suited to you? How much space do you need? Do you want new construction or something with a bit more history? One of the most crucial choices ahead of you, though, is how you’ll pay for it as a Large Down Payment on a Home.
It’s rare that anyone pays for a home in full upfront. Instead, most people start with a down payment and then spend the rest with a home loan. So, if you’re purchasing a home, exactly how much should you be putting down? Is bigger better? There’s plenty of conventional wisdom out there, but the fact is that each person’s financial situation is different. Before you can make a decision, you need to consider both the advantages and disadvantages of a large down payment.
Advantages
Better Interest Rate Reflecting Your Dependability
If you opt for a lower down payment, you may end up with a less favorable interest rate than you would have if you put more money down up front. Lenders are more likely to view people who can commit more money up front favorably, as it means you have a lower outstanding balance. This gives the lender confidence they can recoup their money if the borrower defaults. The lower the risk to the lender, the lower interest rates tend to be.
You’re also showing them that you’re willing to put more skin in the game, convincing them that you’re committed to seeing the process through to the end. Finally, with a higher down payment, you’ll have a lower amount to pay off over time. This makes a lender feel you’ll be more likely to reach the end of the payments, regardless of what happens in the intervening time.
Your Monthly Payments Will Be Lower
When you make a larger down payment, your monthly payments will likely drop as a result. This is due to a few factors. First, you’ll have less to pay off overall, so your loan balance will be smaller, which results in lower monthly payments. Second, by putting down a larger sum up front, you’ll likely end up with a lower interest rate. Lenders tend to view loans with smaller down payments as riskier, causing them to charge a higher rate to compensate for any potential losses.
Additionally, you won’t have to worry about paying private mortgage insurance (PMI) each month. When your down payment is less than 20 percent of the home’s purchase price, your lender may require you to pay a PMI premium on top of your monthly payment to help protect the lender if you default on the loan. When you’re willing to put up a larger down payment (20 percent or more), your lender is unlikely to require PMI, which helps keep your monthly payment lower.
You’ll Be Able to Pay Off Your Mortgage Sooner
If you’ve ever had a long-term loan, you know it’s no fun living under its shadow. Even if you manage it well and fit it into your budget, interest can really add up over the years. By opting for a larger down payment, you can minimize the number of payments you’ll need to make in the future. That gives interest much less time to build up, saving you a sizable amount in the long run.
It may be hard to calculate exactly how much you’ll save on your own, so we recommend using a payment calculator to figure out the specifics. The difference between a 10 percent down payment and a 20 percent down payment can add up to thousands of dollars in interest, so consider what makes financial sense for you in the long run.
Disadvantages
Loss of Liquidity
One of the major disadvantages of a large down payment is the loss of financial liquidity. When you put a large amount of money down up front, you’re tying up every dollar in the future of that home. That means you won’t be able to use it for anything else that might crop up in your life, no matter how much you might need it.
Maybe you end up needing to make expensive repairs to the home you’re paying off, leaving you with a large bill and a scant amount of cash to pay for it. Maybe an unforeseen emergency comes up, demanding a sizable amount of your available finances. It’s hard to say what costs you need to budget for in the future, so remember to account for the unexpected.
The Money Can’t Go Anywhere Else
Whenever you’re considering spending a large sum of money, it’s hard not to imagine what else it could be going toward. People have retirement to save for, college funds to grow, and other investment opportunities that may be quite attractive. Another disadvantage of a large down payment is that all the money gets tied up in the house. You cannot shift it into other investments. When determining your ideal down payment, don’t forget to consider all the other work that money could do for you.
The Upside Comes Later, Not Now
A large down payment will certainly benefit you in the long run, but you’re not likely to see any returns in the immediate future. When considering a large down payment, ask yourself how long you plan to stay in the home. The financial benefits don’t come about until after you’ve had time to pay off the loan, which is one of the admitted disadvantages of a large down payment. If you’re not planning to keep the house for a while, it might not make sense for you to invest that much money up front.
So, What’s the Right Decision?
Really, only you can make the call. You know your financial circumstances better than anyone, and only you can determine what size down payment makes sense for you. Of course, you don’t need to go it alone. If you need any help puzzling through the advantages and disadvantages of a large down payment, Solarity Credit Union can help. Whether it’s your first time buying a home or you’re a seasoned investor, their expertise and care are available to you to help you make the right decision for your situation.
