Advantages and Disadvantages of a Large Down Payment

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Mike Romano

Jul 10, 2023

Mike Romano is a mortgage industry veteran with over 20 years of experience. His expertise spans mortgage technology, credit risk, and loan origination, and he has spoken at many mortgage and fintech conferences. He has a Bachelor's and MBA from the University of California, Berkeley and currently resides in Austin, TX. NMLS # 2515901

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    When most people think of buying a home, they assume it’s best to make the largest down payment possible. However, this isn’t always the case. There are many advantages to making a large down payment, such as better interest rates and increased purchasing power, but it isn’t the right option for every situation. 

    To make the most informed decision based on your financial situation, it’s important to weigh up the advantages and disadvantages of a large down payment. This article lays out the pros and cons to help you make your choice.

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      Disclaimer: This article is for informational purposes only and should not be considered as legal or financial advice. Please consult an attorney, mortgage lender, or CPA for guidance on your specific situation.

      Overview: Advantages vs. disadvantages of a large down payment

      Advantages of a large down paymentDisadvantages of a large down payment
      Better interest rate and loan conditionsLess financial flexibility
      Increase home purchasing powerLimits investment opportunity
      Potentially shorter mortgage payoffMay not be ideal if you plan to sell soon
      Lower monthly paymentsMay not be feasible, depending on your finances
      Remove private mortgage insurance (if 20%)

      Disadvantages of a large down payment

      There are a number of advantages to making a large down payment, and we’ll get to those next, but the reality is that if you use money to make a large down payment, you can’t use that money for other things. In other words, most of the disadvantages of a large down payment boil down to the opportunity cost. 

      It might be worth it to make a large down payment, but you should understand what you’re giving up to do so.

      Less financial flexibility

      A house is a very valuable possession, but the value of a house is inflexible. Short of taking on more debt with a second mortgage, you can’t use the value of your home to cover an emergency expense, make another large purchase, or take on repairs or improvements to your property. 

      Having cash on hand is the exact opposite. It’s the ultimate financial flexibility, and many financial experts would advise keeping some cash savings for emergencies. That being said, there’s a balance between maintaining your financial flexibility and using your money to make financial progress.

      How you address this balance will be unique to your situation. But it’s worth considering carefully.

      Limited investment opportunity

      This disadvantage is similar to the limited flexibility issue. If you invest your money in your home, you can’t invest it elsewhere. A house is generally a good investment, but there are other investments which are valuable as well.

      Paying off your mortgage sooner is good, and it could save you a lot of money in interest over the years, but it’s also important to put money into your retirement investments and other long-term financial planning assets. 

      It may be possible to get more return on investment from putting money into your 401K than you from making a larger down payment. This isn’t always the case, but it’s important to do your research and assess the tradeoffs of investing money in your house versus investing money elsewhere.

      Not ideal for short-term situations

      If you are buying a house with the intention of selling it in the near future, it may make more sense to put up a smaller down payment and maintain more flexibility elsewhere. 

      If you only plan on staying in a house for, say, five to eight years (or flipping the house in even fewer years), the longer-term benefits of making a large down payment might not come to fruition for you. 

      Might not be feasible

      The last challenge with making a large down payment is that it might not be feasible based on your current finances. Waiting years to save up more for a down payment will delay your entrance into the market. Depending on how quickly housing costs are rising in your area, this could easily edge you out of the market altogether.

      There are ways to leverage down payment assistance so you can make a larger down payment without waiting years to save up, and we’ll talk about those in a few minutes. But generally speaking, it’s often preferable to purchase a house with a lower down payment rather than delay making a purchase for years.

      Advantages of a large down payment

      Of course, there are advantages to making a large down payment. For many people, these advantages are beneficial enough to justify the tradeoffs. 

      More favorable purchase conditions

      In most cases, a large down payment makes your offer stronger and gets you better purchase conditions, most notably a lower interest rate. With a conventional loan, the interest rate gets reduced at certain down payment amounts.

      The interest rate is reduced if your down payment is 5% of the purchase price, then again if your down payment is 10% of the purchase price, and the lowest interest rates come with a 20% down payment.

      There are other conditions which can be improved with a larger down payment, but the interest rate is the big ticket item.

      Increased home purchase budget

      If you have more money for a down payment, it reduces how much money you need to borrow and can net you a lower interest rate. Therefore, you may be able to afford a more expensive house on the same salary if you make a large down payment.

      Shorter mortgage payoff

      This advantage is contingent on being able to continue investing money in your home. If you make a large down payment that reduces your monthly mortgage payments below your budget, you can use that extra money to pay more on the principal each month.

      Eventually, this leads to paying off your mortgage faster.

      However, this only really works if you can pay extra on the principal every month. Making a larger down payment doesn’t shorten the terms of the loan. A 30 year loan is a 30 year loan, regardless of the down payment amount.

      Lower monthly mortgage payments

      A smaller loan and a lower interest rate means your monthly mortgage payments will be lower. Lower monthly payments are better, of course. Keep in mind, though, that you’ll see the biggest reductions in your monthly mortgage payment if you can hit the 5%, 10%, or 20% down payment mark.

      No private mortgage insurance

      Private mortgage insurance (PMI) is required if you make less than a 20% down payment on a conventional loan. Private mortgage insurance can cost hundreds each month, so making a large enough down payment to avoid PMI can significantly reduce your total monthly payments.

      It’s also worth noting that most PMI automatically cancels once you have 22% equity in your home. Therefore you could make a large enough down payment to get a lower interest rate (5% or 10%), and pay extra on the principal until you hit that 22% equity mark to remove the PMI and reduce your monthly payments.

      Further reading: How to Calculate Self-Employed Income for Mortgage Loans

      What is the average down payment?

      According to the National Association of Realtors, the average down payment is 6% for first-time home buyers and 13% for repeat home buyers. The minimum down payment for a conventional loan is 3%, but you can get non-conventional loans with zero down payment.

      Interestingly, (again according to the National Association of Realtors), 35% of buyers believe they need a 16% to 20% down payment, and 10% of homebuyers think they need more than a 20% down payment to purchase a home.

      Down payment requirements are likely lower than you think. There are also more options for down payment assistance than you might realize.

      How to come up with a larger down payment

      Most people save up for a long time to make a large down payment. Others rely on gifted down payments to purchase a home. But there are more down payment assistance options than most people realize.

      State, local, and federal governments sponsor down payment assistance (DPA) programs. Companies and private organizations also offer DPA assistance. Broadly, down payment assistance programs fall into one of three categories: grants, loans, and special credit programs.

      As the name suggests, a grant is money you can use to increase your down payment, and you don’t have to pay the money back. 

      Loans must be repaid, but most DPA loans are structured to make them an affordable and feasible option for making a down payment. Some even offer options to have the loan partially or fully forgiven.

      Special credit programs are programs that offer loans to buyers from underserved communities who may not qualify for traditional loan financing. Special credit programs usually have lower credit score requirements as well as other options for reducing the financial burden of home ownership.

      Learn more about your down payment options and how Stairs Financial can help you make sense of it all.

      The bottom line: Should you make a large down payment?

      You’ll have a lot on your home buying to-do list, but the size of your down payment is going to be one of the most important choices.

      Whether or not you should make a large down payment depends on your financial situation. There are tradeoffs in making both a large and small down payment, and the best approach is to avoid viewing the decision as an all-or-nothing proposition.

      If you have money to make a down payment, that doesn’t mean you must use all of it to make the largest down payment possible.

      For instance, it might make the most sense to make a 5% down payment to get that interest rate reduction, then invest the rest in your retirement or use it for initial home improvements, which can help you get to 22% equity and remove the private mortgage insurance.

      This is just one example. There are other equations that might work better for you. The most important thing is to be mentally flexible about how you use your down payment funds, even if those funds come from down payment assistance. Many down payment assistance programs allow you to use the money for other closing costs or initial home improvements.

      Do your homework, map out all the possibilities, and consult with experts about your situation whenever possible. 

      Get help finding down payment assistance

      The amount of down payment you invest in your house is an individual decision, based on a lot of different factors. For many first-time homebuyers, one such factor is down payment assistance (DPA). 

      There are a number of DPA options available, but they can be hard to find and even harder to make sense of.  

      Stairs Financial can help. 

      Stairs connects you to qualified lenders who work with all the down payment assistance programs you might qualify for, then lets you compare your options side-by-side.

      Learn more.

      Find up to $15,000 towards a home 🏠

      Compare local down payment assistance and find a mortgage, fast.

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