Blog

Is a Bigger Down Payment Always Better?

Is a Bigger Down Payment Always Better?

September 25th, 2019 | Purchasing a Home, Preapproval, Mortgage Advice

In the homebuying process, if you find yourself in the enviable position of having more cash than needed for a minimum down payment, it may be difficult to know just how much you should put down. A larger down payment can bring plenty of benefits, but is it always best to contribute the biggest down payment possible? 

First, remember that every loan program has its own down payment requirements. FHA loans for example require a minimum of 3.5% while jumbo loans will require at least 10%. To get a conventional loan without PMI you’ll need 20%. USDA and VA, by contrast, do not require any down payment at all. Part of your decision will be based on which loan program fits your needs.

The Benefits of Big Down Payments

  • Lower Payments
    The higher your down payment, the lower your actual mortgage loan total will be. That will translate into lower, more affordable monthly payments.
     
  • Lower Interest Rates
    When you contribute a significant amount of money, the lender’s risk of loss decreases. This is because you have more to lose if you were to default and statistically, those who contribute larger down payments have lower rates of foreclosure. Because you are putting so much skin in the game, lenders will offer you lower interest rates. That could end up saving you thousands over the course of your loan.
     
  • More Equity
    You will have more instant home equity with a larger down payment. Essentially, that means you truly own a bigger chunk of your home right off the bat. For some people, owning their home outright is a priority and a big down payment can jump start that process.
     
  • No (or Less) PMI
    When your down payment is 20% or higher, you will not be required to pay private mortgage insurance. PMI is required for those with less than 20% as a way to protect the lender in case the borrower defaults. Of course, you can have PMI canceled once your equity reaches 20% but you can save money by never having to pay for it in the first place with a large down payment.

The Drawbacks of Big Down Payments

  • Less Liquidity
    Once you put all that cash into your home loan, it is no longer liquid and at your immediate disposal. If a life emergency arises and you have not held onto much money after your home purchase, you may be in a tough spot financially. In order to access your home equity, you will have to apply for a home equity loan or a cash-out refinance, or even sell your home.
     
  • Investment Opportunity Cost
    Owning a home is not the only way or best way to build wealth. You may want to make a minimum down payment so that you can invest capital elsewhere – stocks, bonds, REITs, mutual funds, etc. If you sink all your available cash into a home, you will lose the opportunity to possibly grow it faster in other investment vehicles.
     
  • Higher Risk in Bad Economies
    And of course, a larger down payment puts you at greater risk of losing your capital if the economy tanks and home prices plummet. It could take years for the market to correct itself and restore your equity. This makes it tough if you need to move before full recovery.

Because there are many pros and cons on both sides of the issues, ultimately, the size of your down payment should be determined by your overall financial goals, your current level of savings, and your tolerance for risk.

Call us today at 858-722-3206 for a no-obligation analysis and discussion of your mortgage goals. 

Brookstone Mortgage Corp

7220 Trade Street, Suite 132, San Diego, California 92121
Phone: 858-722-3206 | Fax: 888-219-8036
Email: lmdelgado1@outlook.com
NMLS# 915904. Licensed to conduct business in the following states: AZ (#0923614), CA (CA Bur of Real Estate - Real Estate Broker, Broker# 01919508), TX (Mortgage Company License). These materials are not from HUD or FHA and were not approved by HUD or a government agency.

Texas Mortgage Broker Disclosure

CONSUMERS WISHING TO FILE A COMPLAINT AGAINST A COMPANY OR A RESIDENTIAL MORTGAGE LOAN ORIGINATOR SHOULD COMPLETE AND SEND A COMPLAINT FORM TO THE TEXAS DEPARTMENT OF SAVINGS AND MORTGAGE LENDING, 2601 NORTH LAMAR, SUITE 201, AUSTIN, TEXAS 78705. COMPLAINT FORMS AND INSTRUCTIONS MAY BE OBTAINED FROM THE DEPARTMENT’S WEBSITE AT WWW.SML.TEXAS.GOV. A TOLL-FREE CONSUMER HOTLINE IS AVAILABLE AT 1-877-276-5550.

THE DEPARTMENT MAINTAINS A RECOVERY FUND TO MAKE PAYMENTS OF CERTAIN ACTUAL OUT OF POCKET DAMAGES SUSTAINED BY BORROWERS CAUSED BY ACTS OF LICENSED RESIDENTIAL MORTGAGE LOAN ORIGINATORS. A WRITTEN APPLICATION FOR REIMBURSEMENT FROM THE RECOVERY FUND MUST BE FILED WITH AND INVESTIGATED BY THE DEPARTMENT PRIOR TO THE PAYMENT OF A CLAIM. FOR MORE INFORMATION ABOUT THE RECOVERY FUND, PLEASE CONSULT DEPARTMENT’S WEB SITE AT WWW.SML.TEXAS.GOV. THIS DISCLOSURE WAS DELIVERED TO THE CONSUMER VIA OUR WEBSITE.