Advantages of a Large Down Payment
There are numerous mortgage loan programs available in which you can make a minimal down payment (sometimes as low as zero), but making a larger down payment when purchasing a home has intrinsic benefits that can help a potential homeowner save money in the long run. While offering more money upfront will clearly reduce the overall amount owed, there are some additional advantages of making a large down payment when buying a home.
No Private Mortgage Insurance (PMI) Premiums
Lenders will require a homebuyer who borrows more than 80% of the total home’s value to pay PMI. PMI premiums are included in the monthly mortgage payment and protect the lender in case of mortgage default. Depending on the down payment and credit scores, this extra amount (on an annualized basis) can typically range between 0.3% – 1.3% of the total mortgage loan. In the long term, these premiums can add up to thousands of dollars annually depending on the housing costs. The good news is that you can avoid these costs by making a down payment on your property that is at least 20%.
Smaller Monthly Mortgage Payments
It is obvious that the less you borrow, the less you will have to pay back. That’s why making a large down payment on your home can lead to reduced monthly mortgage payments. The payment is less due to borrowing less, but also because there will not be any PMI as discussed above. This double bonus scenario leaves you with less stress and potentially more cash flow for other projects and important needs.
Less Overall Interest
Putting down a large down payment will have a significant impact on your long-term finances and help you save a lot in the long run. For instance, if you borrow $200,000 to buy a house without a down payment and take 30 years to repay it at a loan interest of 4%, then you will have to pay $143,735 in interest. On the other hand, if you borrow $160,000 with a down payment of $40,000 over the same duration and with the same interest rate, then you will end up paying only $114,989 in interest. The down payment option in this example saves you $28,746.
Realistic Home Lending
While the benefits of putting down 20% of a home’s total purchase value are no doubt appealing, it’s understandable that not everyone can afford to make such large a down payment toward the purchase of a home. If you are not in a position to make a large down payment because of your financial situation, then finding a mortgage lender that will work with you can make all the difference.
Mortgage Lending That Works for You
At Butler Mortgage, more than 90% of our customers in the Central Florida market put 5% or less down when they buy a house. We provide loans that are tailored to each person’s unique financial situation.
If you’re in need of financial assistance to buy a home, consider Butler Mortgage. To learn more about our mortgage lending services, contact us today at 407-931-3800 or fill out our free consultation form online.