If you are lucky enough to have the financial wherewithal to
make a down payment on a home that’s greater than the traditional 20%, the
question becomes, should you do so? In fact, there are many benefits to making
a larger-than usual down payment, as follows:
- No PMI
premiums. If you at least pay 20% of your purchase price, you won’t have to
pay private mortgage insurance, or PMI. Lenders routinely require this of homebuyers
who borrow more than 80% of the home’s value. This type of insurance never
results in any compensation to you – its purpose is to protect the lender if
you default (fail to pay back the loan on time). PMI typically costs from .5%
to 1% of the loan amount, which can add thousands of dollars per year to your
housing costs until you are able to get your equity to the 20% level, at which PMI
is no longer required.
monthly mortgage payments. If you borrow less money, you will obviously have
less to pay back. This leaves you more cash for other things, or potentially
enables you to take out a shorter-term mortgage with a lower interest rate.
interest overall. By borrowing less, you’ll owe less in total interest.
This can make a huge difference to your long-term finances. For example, if you
bought a house for $200,000 with no down payment (unlikely, but this is a
hypothetical!), and took out a 30-year, fixed rate loan at 4% interest for the
full amount, you would have to pay approximately $143,735 in interest over the
life of the loan. But you would pay only about $114,989 over the life of a
$160,000 loan with the same terms. The bank would get over $28,746 less in
interest just because you put $40,000 down at the beginning.
lenders offering low interest rates. Lenders love borrowers who take out relatively
small mortgages on homes, for the simple reason that if the lender has to
foreclose, it stands an excellent chance of being able to sell the house for
more than the loan amount. Not only that, but the lender figures you’ve got
more incentive to keep paying if you stand to lose your down payment if and when
the lender does foreclose. So, if you are a borrower with poor credit, you
might be able to raise your desirability in the eyes of lenders and obtain
better loan terms if you fork over more cash at the beginning. Or if you’re
buying a luxury home, you might be able to avoid the higher interest rates that
come with “jumbo” loan territory (if your loan exceeds an amount set by the
federal government for that regions of the U.S.) by making a down payment that
brings your loan below the federal cutoff levels.
odds of getting the house in a multiple-offer situation. If you’re trying
to outbid other prospective buyers on a home, price is not the only consideration
for the seller. Smart sellers also give weight to the issue of which buyer is
most likely to successfully close the deal. Because failure to obtain bank or
loan financing is a common reason for deals to fall through – and again, it’s
easier to get a loan if you make a large down payment – the seller’s eyes will
light up if you can show that you’ve got the cash to sew up a good part of the
Of course, not everyone can make even a 20% down payment, as
discussed in the “Affording
a House” section of Nolo’s website. But with some creative strategies, as
described in “Your
Down Payment: Where Will It Come From?” you may get be able to muster up
the needed amount more easily than you expected.