Is Putting A Big Down Payment On A Home Smart?

 In Blog, Real Estate Questions

Once you find the perfect house and taken out a mortgage to make the purchase, you will typically have to make a down payment on the loan.


Many buyers choose to take out loans with extremely loan down payments in order to reduce the impact making a down payment has on their finances. While 20% has long been considered a standard down payment, some loans require down payments as low as 5%, 3%, or even 0%.


However, making such a small down payment means you will end up paying more in the future. Down payments reduce the total amount borrowed, meaning your overall interest will also be lower.


While making a small down payment can be a good idea, there are several reasons you should consider making a larger one if possible.



Why You Should Make a Big Down Payment

For those whose income allows it, making a down payment can grant you a variety of benefits.



Reduced Interest Rates

One of the largest factors that will determine the overall cost of your loan is its interest rate. High interest rates could lead to you spending thousands of dollars per year without reducing the principal amount of your loan.


Making a payment equal to or greater than 20% will not only reduce the term of your loan but will also usually lead to lower interest rates. High interest rates are a way for lenders to reduce their risk when lending to riskier borrowers.


Making a larger down payment will reduce your loan-to-value ratio, which will help you qualify for better interest rates and loan terms.





Increase Your Chances of Approval

Being able to make a large down payment will increase your chances for approval — particularly if you have poor credit.


Lenders want to reduce their risk as much as possible. Having the finances to make a down payment as large as 20% indicates your financial wellbeing and helps demonstrate that you will be able to repay the amount that you borrow.


Your down payment could potentially be the difference between being approved or denied.



Pay off Your Mortgage Quickly

Nobody likes being in debt.


When it comes to homeownership, it can be difficult to sell your home when you still owe money on your mortgage. On top of that, paying off your loan will make it easier to save money and improve your financial stability.


Making a large down payment could lead to you paying off a 25-year mortgage in as little as 15 years. This will help you prepare for retirement and make it easier to relocate if necessary.


Not everyone has the money to make a significant down payment on their home. Even those who can afford it may choose to make a smaller down payment in order to avoid a significant impact on their finances.


However, making a larger down payment than necessary can save you thousands of dollars in the long run and help you get out of debt as quickly as possible. If you can afford it, making a large down payment may well be worth it.

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