When shopping for a home, you will need to make a decision about how large or small a down payment you can or are willing to make.
Sometimes, that decision is made for you by necessity. But other times, you might have enough financial flexibility to decide for yourself if you want to put down 3.5%, 10%, 20%, or some other amount.
Let’s go over the advantages and disadvantages of small vs. large down payments.
Pros of Large Down Payments
- More of your house is paid off in advance. This is one of the most compelling benefits. The larger the amount you pay at the start, the less you have to worry about in the future.
- You should save on interest and have lower monthly payments. A mortgage with a large down payment will have lower monthly payments than one with the same length but a smaller down payment. You may find those more manageable. Alternately, you can pay your mortgage off faster and accrue less interest.
- You reduce your risk profile. The more you are willing to pay when you sign on a loan, the less risky you are and the more negotiating power you have.
- You might be able to shop a wider selection of homes. With enhanced bargaining power comes more options, perhaps bringing your ultimate dream home within reach.
Cons of Large Down Payments
- You may not be able to afford it. Sometimes, you simply cannot put a large down payment on a home even if you want to, because you just do not have the savings for it.
- Your finances will be tighter going forward. If you do put a large down payment on a home, it could be harder to manage your tight budget in the future.
- You cannot invest in something else. With your money tied up in your home, it is no longer available to put into other investments.
- Your investment in your home will lose value if your home does. Real estate is like any other investment in that it is not without risk. If you make a large down payment, you take a bigger risk at the outset.
Pros of Small Down Payments
- Your finances will be more liquid and flexible, giving you more stability from month to month. With a smaller down payment, you can keep more of your money available for everyday bills and purchases in your accounts.
- You can invest in something else. The money you do not invest right away in your home could go into a different investment, perhaps one which could accrue more value more rapidly.
- You can buy a home now instead of waiting. If you are in a situation where you cannot afford a larger down payment even if you would want to, being able to make a smaller down payment makes it possible to purchase a house right away instead of waiting months or years to do so.
- If you are just purchasing a home for a few years, you avoid unnecessarily tying up your money in it. It makes more sense to invest a larger down payment in a home you intend to spend a long-time in. If you will be moving on soon, keeping your finances as flexible as possible is more logical.
Cons of Small Down Payments
- You might need to pay for private mortgage insurance (PMI). One of the biggest detractors of small down payments is that you might have to purchase private mortgage insurance or pay mortgage insurance premiums (MIP). Whether it is MIP or PMI depends on the type of loan, but this is an added monthly expense either way.
- It will take you longer to pay off your loan and you may accrue more interest. If you only pay a small amount on your home upfront, you might require a longer loan term to keep your monthly payments affordable. If so, more interest will pile up over the longer loan term, and ultimately, the mortgage will be more expensive.
- You might need to make larger monthly payments. On the other hand, if you do not want to extend your loan term, you will have to pay more toward your mortgage every month, which can make finances tight.
- You will need to compensate for risk elsewhere in your borrower profile. A larger down payment can offset risk factors in your profile. But without one, problems with your credit score or DTI ratio will be more glaring. You may need to put more work into improving these.
Island Coast Mortgage Can Help Buy a Home with a Large or Small Down Payment in Cape Coral, FL
With pros and cons in both directions, you may not be sure whether a large or small down payment is ideal for your situation.
At Island Coast Mortgage, we can help you figure out the potential advantages and disadvantages of either option given your financial scenario.
Whether you want to put down 20% or zero on your mortgage or anything in between, we can connect you with the competitive home loan that will serve your needs.
To get started now, please give us a call at 239-214-7011. We look forward to connecting you with a mortgage in Cape Coral or anywhere in FL.