The pros and cons of putting a larger down payment on a home

When homebuyers are ready to take the money they’ve saved and put it toward a home, it isn’t likely they are going to pay for it entirely in cash. Most of us save some to put as a down payment and have to finance the rest. And depending on the financing homebuyers are seeking, the amount they have to put down varies.

Generally, depending on homebuyers’ credit scores, most are required to put a minimum of 3 percent down (3 percent is the minimum for a conventional loan). There are benefits, and a few drawbacks, to paying more toward a down payment.

The Good

The general rule of thumb is, the more homebuyers put toward a down payment, the better the interest rate they receive to pay off the mortgage. With that, they can save thousands in interest over the repayment of the loan, as well as have a lower monthly payment.

In addition, if homebuyers can pay 20 percent or more as a down payment, they avoid having to pay private mortgage insurance. Lenders will require such insurance if borrowers put less than 20 percent down as a way of protecting themselves should borrowers default on their loan. Once the borrower makes payments each month and reaches 20 percent equity in their home, they can cancel their private mortgage insurance.

The Not So Good

The amount of money someone applies as a down payment will likely take them a little while to save. We’re talking at least months, but in many cases, it could take several years of diligently putting money away regularly before you get to the amount you want to save.

But what if the housing market is ideal for buying but homebuyers haven’t yet saved as much as they want? That is the conundrum that faces many when it comes time to make perhaps the biggest purchase of their lives.

Saving solely for a down payment could have other unforeseen consequences. For instance, if a family takes just about the entirety of their savings and puts it toward that down payment, they could make themselves vulnerable to emergencies and have few options to pay the costs to recover. Those emergencies certainly could be related to their home, like a burst water pipe or extensive repairs on a furnace or air conditioner. But perhaps an emergency is related to one’s health and not the home. Either way, having money saved for such emergencies is important.

Another aspect to consider is how long the buyer intends to live in the home. If the original goal is to stay in the home as long as possible, then putting as much down as possible makes sense. But if the owner doesn’t plan on staying long, it makes less sense to put a whole lot of cash down.

Homebuyers should take some factors into consideration before diving headlong into real-estate and home financing. That includes what the market is like in the areas they are looking to, what their ultimate goals are and what their personal finances are like.

There are several mortgage options available to potential homebuyers including those that don’t require as much as 20 percent as a down payment. Better Lending’s team of experienced loan advisors is ready to discuss all options. When you are ready to discuss those options, call 888-400-1373 or email us at [email protected].