If you’ve started shopping for a mortgage, you know that there are programs out there that don’t require a down payment. There are even those that require just a small percentage down, compared to the suggested 20% down that conventional loans require. But does it make sense to do so? Would it be better if you put more money down on the home?
You Won’t Pay for Mortgage Insurance
Let’s start with the most obvious reason – paying mortgage insurance. Who wants to pay an extra insurance premium each month that doesn’t cover themselves? PMI or government-backed mortgage insurance covers the lender. It ensures that the lender receives a portion of the money they lost if you default on the loan. Sure, this insurance is how lenders can have looser guidelines, but it’s at your expense.
If you are able to put more money down, you won’t have to pay PMI on a conventional loan. You may also be in a better position to obtain a conventional loan even if you have lower credit scores or a higher debt ratio. That ‘skin in the game’ that you have speaks volumes with lenders. This way you can avoid the mortgage insurance issue altogether and just focus on making your mortgage payments.
You’ll Have a Lower Mortgage Payment
You will likely make mortgage payments for the next 30 years. That’s a long time. Because no one has mastered how to predict the future yet, having that lower payment can provide a safety net for you. Sure, you had to deplete some of your assets, but you have a mortgage payment that you can comfortably afford. If your income changes for the worse in the future, you may have an easier time keeping up with your mortgage this way.
You’ll Get Better Terms
Lenders like borrowers that have high down payments. Again, it gives you ‘skin in the game.’ The more money you have invested in the home, the more likely you are to work hard to keep the home. The more you have invested the less risk the lender takes. Because interest rates are often ‘risk-based pricing’ you stand to secure a lower interest rate over the life of the loan.
You may also qualify for a shorter-term loan. The less money you have to borrow, the less there is to amortize over the term of the loan. With a lower principal, you may be able to afford a 15 or 20-year term. This means you’ll pay the principal down faster and own your home free and clear much sooner.
You Increase Your Chance of Mortgage Approval
Lenders look for borrowers that pose a low risk. This doesn’t just mean high credit scores and low debt ratios, although those factors help. It also means a high down payment. The more money you are willing to put down, the more likely a lender is to approve you. Lenders want to know that they aren’t the only ones taking a risk on you buying a home. If you have money invested, you take a risk as well. This encourages lenders to give you the loan you need.
You Can Protect Yourself in a Housing Decline
Hopefully, we never experience the housing crisis again, but it sure taught everyone a lesson. The more money you borrow for a home, the less protection you have. If housing prices decline, you are stuck upside down on your loan. You either have to walk away and take the loss or stay put in the home until the values rebound.
When you invest your own money into the home, you’ll still face a loss, but you won’t be ‘stuck.’ If you aren’t upside down on your loan, you can make smarter choices. You protect yourself against a negative equity position. Again, you may still take a loss, but it will be one that is on your terms. If you decide you want to move and sell for less than you bought the home for, that’s your choice. At least you will have a smaller debt to pay off and hopefully have a little money in your pocket.
A large down payment does make a difference when you apply for a mortgage. If you are willing to sacrifice your assets now, it can pay off in the end. Of course, you should make sure you have an emergency fund and retirement savings. You don’t want to completely deplete your assets. Talk with your financial advisor to see what size down payment makes the most sense for you and then reap the benefits of the higher down payment.