Five Reasons to Make a Large Down Payment on a Home

If you are in the market to buy a home and have the financial wherewithal to make a down payment that's greater than the traditional 20%, the question becomes, should you do so? There are, in fact, many benefits to making a larger-than usual down payment, as we'll discuss below, including:

• avoiding having to pay for private mortgage insurance
• reducing the amount of your monthly mortgage obligation
• reducing the total amount of interest you'll owe
• making yourself eligible for better loan terms, and
• boosting the attractiveness of your offer in home sellers' eyes.

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 time PMI is no longer required.

Smaller 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.

Less Owed in 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.

Eager 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.

Better 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 deal.

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 might be able to muster up the needed amount more easily than you expected.