Readers: This is article 10 of 25 from my no-nonsense “Mortgage Basics” quick-reference series.
Although there are exceptions to every rule, mortgage providers generally require homebuyers to contribute a minimum down payment somewhere between 3.5% and 20% of the home’s purchase price.
Of course, it’s usually better to put down the biggest down payment that you can reasonably afford for the following reasons:
Increased loan eligibility. Homebuyers who are willing to put down a larger down payment attract more lenders, which usually leads to lower interest rate loans. It also allows them to qualify for a wider selection of mortgage options.
Greater loan flexibility. The bigger the down payment, the less you have to borrow. It also allows you to opt for a shorter-term loan, thereby reducing your interest payments over the life of the loan.
Fewer add-on expenses. Borrowers who put down 20% avoid paying for private mortgage insurance.
On the other hand, you should scale back the size of your down payment if:
It depletes your savings. This could be disastrous if you run into unexpected financial trouble.
There are better uses for the money. A lower down payment can make sense for homebuyers who are confident they can earn an investment return elsewhere that’s higher than their mortgage interest rate.
Photo Credit: GotCredit