There are a few components of any homebuying situation that are relatively well-known, and one of these is the down payment. Referring to the amount of money that the homebuyer is putting toward the purchase price of their home in a lump sum at the closing of their purchase, down payments will typically be the largest chunk of money you pay during your homebuying process -- and when it's possible, paying a larger down payment holds multiple benefits.
At Integrity First Lending, we're here to assist a wide range of homebuyers throughout Utah with all their needs, offering tools ranging from real-time mortgage interest rates to expert assistance with all our loan programs and more. We've helped hundreds of clients navigate the down payment process, and we'll do the same for you. While paying a sizable down payment isn't necessarily possible for all borrowers and homebuyers, there are definitely some key areas of value to those who can manage it. Here's a primer.
There's really no set answer to this question, as what some might consider a "large" down payment could be different for others. It's all relative to the purchase price of the home, your personal finances and other factors specific to your situation.
In general, most lenders will allow you to put down as little as 3% on a conventional loan if you're a first-time homebuyer -- though keep in mind that you'll likely need to pay Mortgage Insurance Premiums (MIP) if your down payment is less than 20%. With an FHA loan, the minimum required down payment is 3.5% of the purchase price, while VA and USDA loans boast 100% financing with no money needed at closing.
For some, the threshold for a "large" down payment would be the traditional 20% down of the home's purchase price that allows you to avoid paying MIP on a conventional loan. But for others, anything 10% or above could be considered substantial.
Our next several sections will look at why it pays to make your down payment as large as realistically possible.
First and foremost, one of the more well-known benefits of making a larger down payment is that it immediately reduces the loan amount you'll need to finance. So, if you're taking out a $250,000 mortgage and making a 20% down payment of $50,000, your loan balance will be $200,000. But if you can manage a 30% down payment of $75,000, your loan balance will drop to $175,000.
This is important for a few reasons. Obviously, the lower your loan balance, the less interest you'll ultimately accrue over the life of your mortgage. But in addition, having a lower principal balance can also help you build home equity more quickly.
Home equity is the portion of your home's value that you actually own, as opposed to what you owe on your mortgage. So, if your home is currently valued at $250,000 and your loan balance is $200,000, your equity would be $50,000. But if you can reduce that loan balance to $175,000 through a larger down payment, your equity immediately jumps to $75,000.
This is important because as you build equity in your home, you'll have the opportunity to tap into it later through a home equity loan or home equity line of credit (HELOC). This can be extremely helpful if you need to make a large purchase or fund a home improvement project in the future.
As we briefly touched on before, another key benefit of making a large down payment is that it can help you avoid paying private mortgage insurance (PMI). Most conventional loans require that borrowers pay PMI if their down payment is less than 20% of the home's purchase price.
But what is PMI? Simply put, it's insurance that protects the lender in case you default on your mortgage. And while this might not seem like a huge deal at first, keep in mind that PMI can add a significant amount to your monthly mortgage payment.
For example, let's say you're taking out a $200,000 mortgage with a 10% down payment of $20,000. Based on current PMI rates, you can expect to pay approximately $167 per month in PMI premiums. But if you can increase your down payment to 20%, you'll no longer be required to pay PMI -- which can save you hundreds of dollars each year.
Of course, this is just one example and your actual PMI costs will vary based on a number of factors, including your loan type, credit score and down payment amount. But the point remains that a larger down payment can help you avoid this added expense altogether.
While it's not always the case, borrowers who make larger down payments on their home also tend to qualify for lower interest rates. This is because lenders see these buyers as less of a risk, and are therefore more likely to offer them more favorable terms.
Of course, the interest rate you're offered will also depend on factors like your credit score, employment history and overall financial stability. But if you're able to make a larger down payment, it's definitely worth considering whether or not this could help you qualify for a lower interest rate on your mortgage.
And as you might expect, the lower your interest rate, the less interest you'll ultimately pay over the life of your loan. For example, let's say you're taking out a $250,000 mortgage with a 4% interest rate and making monthly payments over 30 years. In this case, your total interest paid would be approximately $186,511.
But if you can qualify for a slightly lower interest rate of 3.5%, your total interest paid over the life of the loan would drop to $167,765. That might not seem like a huge difference at first, but over the course of 30 years, it can add up to substantial savings.
For more on the major benefits of a large down payment among homebuyers who can manage it, or to learn about any of our mortgage rates, home loan programs or other services, speak to our team at Integrity First Lending today.
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