A down payment is required for anyone looking to purchase their first home, and the simple math is: the larger the payment, the better it is for the home owner.
Putting down a larger payment up front can make a substantial impact to the overall mortgage costs and can also increase the amount of the home you can afford.
Here are some reasons why making a larger down payment can make financial sense.
Higher Down Payment Increases the Chance of Approval Rate
Banks and lenders like to see stability and financial security in their loans, starting with whether you have the ability to save money. That’s because someone who saves his money is typically seen as being committed to his investments and can have a higher likelihood of staying current on his loan.
Having a higher down payment amount also increases the ability to close on a house, especially in the event of a multiple offer situation as it also serves to increase the upfront payment the owner receives.
A Bigger Down Payment Can Bring Lower Interest Rates
Lower interest rates are generally offered when a loan-to-value ratio is on the lower end. This means that the higher your down payment for the home the more likely you are to get a lower interest rate; this lowered interest rate can result in significant savings in interest and fees.
It’s also important to check your credit history and ensure it’s in good standing before applying for a mortgage as having a solid credit history can also help to lower your interest rates as well.
Substantially Lower Monthly Mortgage Payment
If you’re looking to save on your monthly expenses, a bigger down payment can help. By applying more to the down payment of the home price, you’ll be left with less mortgage which means more cash for other things.
A Higher Down Payment Doesn’t Require Mortgage Insurance
If you’re putting down more than 20% of your home’s value as a down payment, you will not be required to purchase private mortgage insurance (PMI). Private mortgage insurance protects a lender in the event you cannot cover future payments; PMI is typically needed when you have a down payment below 20%.
While there are always reasons to hold off on making a larger down payment on your new home – if you can find a better return on an investment, for instance – it is important to understand that a larger up front payment can help to lower your interest rate, help you pay off your mortgage faster and decrease the overall monthly payments you have make.