The challenges faced when buying a home are increasing lately with interest rates on the rise. Interest rates can make a significant difference in how much your home will cost you. Many people strive to put down 20% as that is the threshold for eliminating private mortgage insurance. While this has become a well-known benchmark, many homebuyers do not understand the benefits of a larger down payment to help lower interest rates even further. On the flip side, there are advantages with certain loan programs where you can put down as little as 3% versus the commonly advised 20% down payment. While interest rates are extremely important, there are other advantages for homebuyers who can afford to offer more money upfront.
Read on for good reasons why you should consider making a substantial down payment and when it makes sense to consider less.
Lower Interest Rates
Given market conditions, there is an opportunity for a rate to be lower by putting 25% versus 20% down. Lenders typically will offer a better interest rate when the loan to value ratio is lower. When the down payment is higher, the ratio is lower. This lowers the lender’s risk. This is especially true with condominiums, as the interest rate does get better as the pricing adjustments go down. A lower rate saves the homebuyer a significant amount of money over time.
Borrower Credit Profile
One of the best indicators of creditworthiness and showing a lender strong fiscal responsibility is the ability to afford a large down payment. You are more likely to get approved for a mortgage with more money down. As well, it puts you in a better position if there are multiple offers competing with yours.
Lower Monthly Payments
A larger down payment does not just lower your interest rate but helps with your mortgage as well. This equates to a smaller mortgage amount, which means lower monthly payments. More money in your pocket can help with any updates your new home might need and in the long run fewer dollars of interest paid over time.
Eliminates Need for Mortgage Insurance
Lenders will typically require that homebuyers take out private mortgage insurance (PMI) with down payments less than 20% of the home price. PMI is a protection on behalf of the lender if you are unable to make your mortgage payments. This cost can be eliminated by putting more money down on a house.
When Not To Make a Large Down Payment
A jumbo loan has a very specific meaning in the mortgage world. It refers to a loan larger than a conforming limit that Fannie Mae or Freddie Mac can purchase debt from a lender. Jumbo loans are now available with as little as 10% on a loan amount of $453,100. These homebuyers typically have excellent credit and sufficient income to make the mortgage payment but do not have the 20% available for a down payment. PMI is not mandatory on jumbo loans; however, other restrictions may apply depending on the lender and loan circumstances. A trusted lender can walk you through each loan product to determine which one best suits your circumstances.
Planning for a down payment is an important part of the home buying process. The more information you have from a trusted Realtor and lender the better you and your finances will fare.
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