How much you’re putting down on a house is a decision you should think about carefully. Consider your finances and the loan programs that you are using.
For instance, if you have the budget for a large down payment, it’s a good idea to put it all down to minimize your monthly payments and even reduce the interest rate. This can also save you from needing to pay PMI. However, if you want to keep the money for emergencies, it might not be a good idea to put down more than the bare minimum for approval. However, that would mean paying a higher interest rate reflected in a bigger monthly payment.
There are programs that don’t require down payments at all. But you should know that if you finance 100% of the home’s sales price and the property loses value, you might end up owing more than what it’s worth. Make sure that you speak with an expert on mortgages in Colorado to know more about this. For now, let’s discuss the benefits of making a bigger down payment:
Benefits of Making a Bigger Down Payment
Here are some of the benefits of a bigger down payment that you should consider:
Lower Mortgage Rate
The amount of interest you pay is determined by your loan-to-value ratio (the amount borrowed divided by the property value). The lower your loan-to-value ratio, the lower the mortgage rate you’ll get.
To get the lowest rates for your mortgage, you want to get as close to a 50% loan-to-value ratio as possible, meaning you’ve borrowed 50% of the home’s value. This can easily be done with a significant down payment.
Having a big down payment gives you more home equity. If you’ve already paid off a big chunk of your home, you won’t have to worry about making a payment if you need to sell the property because your payments are already covered by the equity (the difference between the house value and loan amount).
You’ll have to pay the money for any expenses that aren’t already covered by the equity, like the amount for any outstanding payments and the cost of selling the property. However, having a larger down payment means you’re less likely to have to deal with these types of expenses.
Lower Monthly Payments
For most people, the goal of buying a home is to have a place to call home, not to become a landlord. That’s why having lower monthly payments is a great benefit of making a large down payment.
If you’re buying a home for the first time, you’re likely to qualify for a lower interest rate with a large down payment, meaning your monthly payments will be lower than if you had put down less money.
Cheaper Closing Expenses
Many people don’t realize that the cost of the down payment isn’t the only closing cost you have to pay. There are additional closing costs that vary depending on the type of loan and the lender.
Borrowing less money means you’ll have to pay less in closing costs. When buying a home with a small down payment, you might have to pay more in closing costs than you expected because you’ll need a bigger loan to cover your down payment and closing costs.
Why Do Mortgage Lenders Require a Down Payment?
Mortgages were created to help you cover the cost of the home when you can’t pay with cash. Even though you’re borrowing money, you still need to put down a portion of the home’s price.
One thing to note is that you can get a no-down-payment loan for your mortgage, but you will pay a higher interest rate. These loans are usually made for home buyers with FICO scores above 720.
The lender wants proof that you can pay off the loan. Because you’re putting down equity, the lender knows that you believe the home is worth more than you’ve borrowed. If you’re not able to pay off the loan, the lender might lose out on the house. That’s why they want to make sure you can afford to make the payments.
Making a big down payment can save you money. You will get lower interest rates and loan fees, and you’ll be able to make lower monthly payments.
For most buyers, it’s a good idea to make a down payment of 20% or more. But if you don’t have the budget for a large down payment, don’t worry – you can get a no-down-payment loan if you qualify.
Total Lending Concepts is a trusted mortgage lender in Colorado Springs. Get in touch with us today if you are interested in getting a home loan in Colorado Springs.